SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
incorporation or organization) Identification No.)
100 Mallard Creek Road, Suite 400, Louisville, Kentucky 40207
(Address of principal executive offices) (ZipCode)
(502) 899-5355
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.10 NASDAQ SmallCap System
per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes__X__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K._______
As of July 10, 1999, 3,130,413 shares of the Registrant's Common Stock were
outstanding. The aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant as of July 10, 1999 was approximately
$7,239,080 (based on the last sale price of a share of the common stock as of
July 10, 1999 ($2.31), as reported by the National Association of Securities
Dealers, Inc. ("NASDAQ") SmallCap System).
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<PAGE>
PART I
ITEM 1. BUSINESS
Strategic Mission Statement
Caretenders Health Corp. and subsidiaries (collectively "Caretenders" or the
"Company") provide alternatives for seniors and other adults with special
needs and their families who wish to avoid nursing home placement as long as
possible and remain independent, through its network of adult day care centers
and ancillary services. The Company was incorporated in Delaware in 1985.
Adult Day Health Services
- -------------------------
Adult day health services is an alternative method of providing care for
seniors and other adults who without such care would likely be
institutionalized. The field has grown rapidly, from just 15 centers in the
United States in the early 1970s to over 4,000 today. Still in its early
stages, the industry is highly fragmented with the majority operated by the
non-profit sector. To the best of its knowledge and belief, Caretenders is one
of the largest for-profit providers of adult day care services in the U.S.
The Company's adult day health centers provide professional, high quality adult
day health services for disabled or frail adults who require some care or
supervision, but who do not require intensive medical attention or
institutionalization. The average center provides care for over 60 guests per
day, seven days a week. Round-trip transportation is available to each guest.
The centers offer a range of therapeutic and medical services designed to
promote the independence of participants and provide respite to families and
caregivers. On-site staff nurses administer medications and give attention to
medical care. Other services include (i) a light breakfast, a hot lunch, and
an afternoon snack; (ii) a highly structured, individualized and creative
activities program which includes recreation, education, field trips, sports,
crafts, music and group conversations; and (iii) family counseling.
In addition to services provided in the Company's physical locations, some
adult day health services are also provided in the patients' homes. These
services (generally provided by para-professional staff such as home health
aides) are very similar in nature to the care provided in the Company's
facility. This flexibility allows the patient and/or his or her family to
select the venue (or combination of venues) of care that is appropriate for
them. Many Caretenders adult day health patients receive care both at home and
in the Company's facilities.
<PAGE>
As of March 31, 1999, the Company provides services through centers in the
following locations:
<TABLE>
<CAPTION>
Adult Day
Locations Health Centers
---------------------------- ---------------
<S> <C>
Kentucky:
Louisville area 2
Lexington area 1
Indiana:
Evansville 1
Ohio:
Cincinnati 1
Columbus 1
Cleveland 1
Massachusetts:
Boston(1) 1
Connecticut:
Stamford 1
Middlebury 1
Danbury 1
Maryland:
Baltimore(2) 10
Alabama:
Birmingham 1
Florida:
Fort Lauderdale(1) 1
West Palm Beach 1
Fort Myers(1) 1
---------------
Total 25
===============
</TABLE>
(1) Physical facilities for in-center adult day health services are not in
place in these locations. However, some ancillary services are currently
provided. These locations are currently being evaluated for development
of in-center facilities.
(2) For the year ended March 31, 1999 approximately 13% of the Company's
revenues and 23% of segment contribution were generated from Maryland
operations where approximately 94% of that revenue is derived from
Maryland Medicaid reimbursement programs.
Daily capacity for in-facility care was 1,494 guests per day throughout the
year.
Ancillary Services
- ------------------
Through its adult day health centers, the Company provides a broad range of
health care. This enables physicians, payors and patients to deal with a
single provider. All Caretenders services are coordinated through a care
management system by a registered nurse. Ancillary services are categorized
into primary segments (1) Visiting Nurses and (2) Product Operations (3)
Contract Management as further explained below.
Visiting Nurses Segment
Caretenders' Visiting Nurses segment provides a comprehensive range of
Medicare-certified home health nursing services. Payors also include Medicaid
and private insurances. Professional staff including registered nurses,
licensed practical nurses, physical, speech and occupational therapists, and
medical social workers implement and monitor medical treatment plans prescribed
<PAGE>
by physicians. Professional staff are subject to state licensing requirements
in the particular states in which they practice. Para-professional staff,
primarily home health aides also provide care to this category of patients.
The Visiting Nurse segment consists of 12 Medicare-certified home health
agencies operating in Kentucky (4), Indiana (1), Ohio (3), Florida (2), Alabama
(1) and, Massachusetts (1).
Certain changes in Medicare reimbursement for home nursing services became
effective for the Company on April 1, 1998. These changes have had a
significant adverse effect on the Company's revenues and financial performance
and these and other changes may reasonably be expected to adversely impact the
Company in the future. See Government Regulations for more information.
Product Operations Segment
Caretenders' Product Operations, with locations in Louisville and Lexington, KY
and Birmingham, AL provide a wide array of infusion therapy, oxygen therapy and
other product related services.
Home infusion therapy involves the intravenous or other administration of
physician-prescribed nutrients, antibiotics, chemotherapeutic agents and other
medications to patients in their homes. Such therapy generally continues a
plan of treatment initiated in the hospital, or as a substitute for
hospitalization. Home infusion costs are generally between 30% and 70% less
than the same therapy administered in an institutional setting. There are five
major categories of infusion therapy: total parenteral nutrition, enteral
nutrition, antibiotic therapy, chemotherapy and pain management therapy.
Caretenders sells and rents medical equipment for use in the home. While the
Company provides a complete range of equipment, the businesses generally can be
divided into two predominant categories: respiratory/oxygen services and
rehabilitation products.
Certain changes in Medicare reimbursement for home oxygen therapy services
became effective for the Company on January 1, 1998. These changes have had a
significant adverse effect on the Company's revenues and financial performance
and these and other changes may reasonably be expected to adversely impact the
Company in the future. See Government Regulations for more information.
Contract Management Segment
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
performed management services pursuant to management agreements scheduled to
expire in February and June 2000. On September 30, 1998 Columbia/HCA 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.
Accordingly, revenues and segment contribution both declined by approximately
60% in 1999 from 1998 due to termination of the contract.
In October 1998, the Company entered into litigation with Columbia/HCA arising
from the management agreements between the parties. In December 1998 the
parties reached an agreement under which Columbia/HCA has paid 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 offsets the estimated costs of providing the wind-down
services. The balance of $1,350,000 ($793,000 or $.25 per share after tax) was
recognized as a non-recurring litigation settlement gain in the third quarter
of fiscal 1999.
Compensation for Services
In all its segments, Caretenders is compensated for its services through (i)
private pay (paid by personal funds), (ii) Medicare, (iii) Medicaid, and (iv)
other third party payors (e.g. insurance companies). See "Item 1. Business --
<PAGE>
Payment Sources". Caretenders employs compensation specialists who advise
patients as to the availability of sources of payment for its services.
See "Government Regulations - Reimbursement Changes" and "Cautionary
Statements - Forward Outlook and Risks". Management will monitor the effects
of such items and may consider modifications to its expansion and development
strategy when and if necessary.
Acquisitions
- ------------
The Company continually considers and reviews (subject to availability of
capital) possible acquisitions of businesses that provide health care services
similar to those currently offered by Caretenders. Factors which may affect
future acquisition decisions include the quality and potential profitability of
the company under consideration, and the Company's profitability and ability to
finance the transaction.
During 1997, the Company completed three transactions to acquire two visiting
nurse operations and an adult day health services operation. These operations
added to the Company's market presence in both Ohio and Florida. No pro forma
financial information has been provided as the acquisitions, individually and
in the aggregate, are not significant compared to the Company's existing
operations.
During 1998, the Company completed four transactions to acquire two adult
day health services operations and two visiting nurse operations. These
operations added to the Company's market presence in Florida, Connecticut and
Ohio. No pro forma financial information has been provided as the
acquisitions, individually and in the aggregate, were not significant compared
to the Company's existing operations.
Competition, Marketing and Customers
- ------------------------------------
Adult Day Health Services
- -------------------------
The adult day health services industry is highly competitive but fragmented.
Competitors include: other adult day health centers, ancillary programs
provided by nursing homes and hospitals; other government-financed facilities,
assisted living and retirement communities, home health providers and senior
adult associations.
The Company believes the primary competitive factors are quality of service and
reputation among referral sources. However, competitors are increasingly
focusing attention on providing alternative site health care services.
Caretenders competes by offering a high quality of care and by helping families
identify and access solutions for care. Adult day care competitive advantages
include transportation and superior facilities and guest activity programs.
The Company markets its adult day health services through its adult day health
center directors and the marketing staff. The directors contact referral
sources in their areas to market the Company's services. Major referral
sources include: Offices on Aging, social workers, hospital discharge planners
and group living facilities. The Company also utilizes consumer-direct sales,
marketing and advertising programs designed to attract customers.
<PAGE>
Ancillary Services
- ------------------
Competition for visiting nurse and product operation services is significant
but fragmented, with competition largely focused on individual products or
services. The Company's competitors for ancillary services can be classified
into three categories: nursing services, infusion therapy, and medical
equipment.
The Company believes competition is based primarily on the quality of service
provided, and such quality is measured by responsiveness and the technical
ability of the professional staff. The scope of services offered,
relationships with referral sources and price are also competitive
considerations. Caretenders competes with larger home health care providers
through its comprehensive strategy, which facilitates focused accountability,
quality, reduced administrative burdens and convenience for patients and
physicians. Another competitive factor in the home health care industry is
accreditation by JCAHO (Joint Commission on Accreditation of Healthcare
Organizations), a not-for-profit accreditation organization. All Caretenders
ancillary services operations are accredited by JCAHO.
In addition to the larger national companies, Caretenders also competes with
numerous local and regional companies and pharmacies. Many of the Company's
competitors have greater resources than the Company.
The Company's ancillary services are marketed by a direct sales force primarily
to hospital discharge planners, physicians and insurance and managed care
organizations. Referrals may also be sought through advertisements in several
local specialty publications, attendance at major trade shows and voluntary
participation in JCAHO. The Company also utilizes consumer-direct sales,
marketing and advertising programs designed to attract customers.
Government Regulations
- ----------------------
Overview
- --------
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
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.
<PAGE>
Refer to the sections on Reimbursement Changes and Cautionary Statements -
Forward Outlook and Risks below, the notes to the accompanying financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations 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.
Oxygen Reimbursement
Medicare reimbursement for certain oxygen therapy services and products was cut
25% for services provided on or after January 1, 1998 and an additional 5% cut
took effect on January 1, 1999. Future increases have been tied to the
Consumer Price Index and will not resume until 2003. Revenues and pre-tax
income for the years ended March 31, 1999 and 1998 were approximately $1
million and $250,000, respectively, lower than they would have been had this
reimbursement reduction not taken place.
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 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 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. 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.
The Company believes that IPS is causing a contraction of Medicare home health
operations nationwide and is, despite Congressional intentions and HCFA
assurances to the contrary, a reduction of the Medicare home care benefit.
Visits performed by the Company for Medicare beneficiaries declined from
523,000 in 1998 to 350,000 in 1999 for a reduction of approximately 33%.
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
<PAGE>
further reduce costs (including staff reductions) and appropriately control
utilization for operation in the IPS environment. Since April 1, 1998, the
Company has experienced a decline in census, volumes, and length of stay
commensurate with the expectations outlined above. As a result, the Company
experienced a decline in revenues and contribution from this portion of its
operations (which incurred costs of approximately $2.6 million in excess of the
new Medicare reimbursement limits during fiscal 1999).
In July 1998, the Company executed a restructuring plan including work force
reduction, branch closings, and changes in compensation programs designed to
lower its operating costs and recorded a related charge of $550,000 before
taxes for severance, branch closings and other non-recurring expenses. As a
part of this restructuring program, 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 will be in
effect for the Company's fiscal year ending March 31, 2000 that are
approximately 9% higher than the limits in place during fiscal 1999. The
Company's operating costs exceeded limits by approximately 7% in the fiscal
year ended March 31, 1999. For the year ended March 31, 1999 revenues subject
to IPS were $28.7 million or 29.5% of total revenues compared to $34.0 million
and 35.7% in the year ended March 31, 1998.
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.
Permits and Licensure
- ---------------------
Many states require companies providing certain health care services to be
licensed as adult day care centers or home health agencies. In addition,
certain of the Company's pharmacy operations require state licensure and are
also subject to federal and other state laws and regulations governing
<PAGE>
pharmacies and the packaging and repackaging and dispensing of drugs (including
oxygen). Federal laws may require registration with the Drug Enforcement
Administration of the United States Department of Justice and the satisfaction
of certain requirements concerning security, record keeping, inventory
controls, prescription order forms and labeling. In addition, certain health
care practitioners employed by the Company require state licensure and/or
registration and must comply with laws and regulations governing standards of
practice. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect the Company's business.
The Company believes it is currently licensed appropriately where required by
the law of the states in which it operates. There can be no assurance that
either the states or the federal government will not impose additional
regulations upon the Company's activities which might adversely affect its
business, results of operations or financial condition.
Certificates of Need
- --------------------
Certain states require companies providing health care services to obtain a
certificate of need issued by a state health-planning agency. Where required
by law, the Company has obtained certificates of need from those states in
which it operates. There can be no assurance that the Company will be able to
obtain any certificates of need which may be required in the future if the
Company expands the scope of its services or if state laws change to impose
additional certificate of need requirements, and any attempt to obtain
additional certificates of need will cause the Company to incur certain
expenses.
Other Regulations
- -----------------
A series of laws and regulations dating back to the Omnibus Budget
Reconciliation Act of 1987 ("OBRA 1987") and through the Balanced Budget Act of
1997 have been enacted and apply to the Company. Periodic changes have occurred
from time to time since the 1987 Act including reimbursement reduction and
changes to payment rules. Changes are also expected to occur continuously for
the foreseeable future.
As a provider of services under the Medicare and Medicaid programs, the Company
is subject to the Medicare and Medicaid anti-kickback statute, also known as
the "fraud and abuse law." This law prohibits any bribe, kickback, rebate or
remuneration of any kind in return for, or as an inducement for, the referral
of Medicare or Medicaid patients. The Company may also be affected by the
federal physician self-referral prohibition, known as the "Stark" law, which,
with certain exceptions, prohibits physicians from referring patients to
entities in which they have a financial interest. Many states in which the
Company operates have adopted similar self-referral laws, as well as laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers, if such arrangements are designed to induce or
to encourage the referral of patients to a particular provider.
Health care is an area of extensive and dynamic regulatory change. Changes in
laws or regulations or new interpretations of existing laws or regulations can
have a dramatic effect on permissible activities, the relative costs associated
with doing business, and the amount and availability of reimbursement by
government and third-party payors. Furthermore, the Company will be required to
comply with applicable regulations in each new state in which it desires to
provide services.
The Company is subject to routine and periodic surveys and audits by various
governmental agencies. Management believes that the Company is in material
compliance with applicable laws. The Company, however, is unable to predict
what additional government regulations, if any, affecting its business may be
enacted in the future, how existing or future laws and regulations might be
<PAGE>
interpreted or whether the Company will be able to comply with such laws and
regulations either in the markets in which it presently conducts, or wishes to
commence, business.
Payment Sources
- ----------------
The Company receives payments from Medicare, Medicaid and other cost
reimbursement programs, private pay and insurance policies as detailed below.
As noted above, the Company's dependence on government sponsored reimbursement
programs makes it vulnerable to possible legislative and administrative
regulations and budget cut-backs that could adversely affect the number of
persons eligible for such programs, the amount of allowed reimbursements or
other aspects of the program, any of which could materially affect the Company.
In addition, loss of certification or qualification under Medicare/Medicaid
programs could materially affect the Company's ability to effectively market
its services.
The Company's future operating results may be dependent in part upon its
ability to attract customers able to pay for the Company's charges from their
own and their families' financial resources. Circumstances which adversely
affect the ability or desire of seniors to pay for the Company's services could
have an adverse effect on the Company.
The following table sets forth the Company's revenues derived from each major
class of payer during the following fiscal years (by percentage of net
revenues):
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Insurance & Insurance &
Business Unit Medicare Medicaid Private Pay Medicare Medicaid Private Pay
- ------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Adult Day Health Services - % 50.2% 49.8% - % 48.5% 51.5%
Visiting Nurses 81.8% 16.0% 2.2% 87.8% 10.0% 2.2%
Product Operations 37.9% 13.4% 48.7% 38.7% 13.1% 48.2%
Contract Mgmt Services - % - % 100.0% - % - % 100.0%
Total - All Services 38.4% 28.6% 33.0% 45.4% 22.6% 32.0%
</TABLE>
Changes in payment sources from 1998 to 1999 are primarily a result of the
impact of the Balanced Budget Act on the Company's operations.
In determining charge rates for goods and services provided to customers, the
Company evaluates several factors including cost and market competition. The
Company also negotiates contract rates with third party providers such as
insurance companies. The rates of reimbursement for a significant portion of
the Company's charges are dictated by Federal or State programs such as
Medicare and Medicaid.
Insurance
- ---------
The Company and its subsidiaries carry general liability and professional
liability insurance. The Company also carries product liability insurance
associated with those operations requiring such coverage, including the durable
medical equipment operations. The Company's properties are covered by casualty
insurance policies. The Company carries directors and officers liability
insurance with a $10,000,000 limit. The Company carries automobile collision
and liability coverage and statutory workers' compensation coverage. The
Company believes that its present insurance coverage is adequate.
<PAGE>
Employees and Labor Relations
- -----------------------------
As of March 31, 1999 the Company had approximately 3,400 employees. None of
the Company's employees are represented by a labor organization. Management
believes its relationship with the Company's employees is satisfactory.
Cautionary Statements - Forward Outlook and Risks
- -------------------------------------------------
Information provided herein by the Company contains, and from time to time the
Company may disseminate material and make statements which may contain
"forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). These cautionary
statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of "safe harbor" provisions of the Act.
The Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors including but not limited to the following:
a) Regulation and Reform
Legislative proposals are continually introduced or proposed in Congress and in
some state legislatures that would effect major changes in the health care
system, either nationally or at the state level. However, the Company cannot
predict whether any of the proposals will be adopted, and if adopted, no
assurance can be given that the implementation of such reforms will not have a
material impact on the operations of the Company.
b) Interim Payment System
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 through a new 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 was effective for all home care
agencies for cost reporting years beginning on or after October 1, 1997 and
went into effect on April 1, 1998, for the Company. The BBA, as amended 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, 2000.
Under the BBA an additional 15% reduction in cost reimbursement limits will
take place if PPS is not enacted by the October 1, 2000. 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 under continual pressure to reduce their costs of
providing services and it is expected that utilization of home care services
per beneficiary will continue to be constrained. There can be no assurance that
payments under the IPS and/or PPS programs will be sufficient to cover the
costs allocable to Medicare patients. The Company believes that the eventual
implementation of PPS will have a significant effect on the Company's revenues
and results of operations, however, the Company is currently unable to predict
what this effect may be. Approximately $28.7 million or 30% of the Company's
1999 revenues were IPS related. Refer to "Government Regulations -
Reimbursement Changes" for a more detailed discussion of this topic.
c) Maryland Concentration
For the year ended March 31, 1999 approximately 13% of the Company's revenues
and 23% of segment contribution were generated from Maryland operations where
approximately 94% of that revenue is derived from Maryland Medicaid
reimbursement programs. Although the Company is not aware of any significant
initiatives currently underway that would have a material adverse impact on the
Maryland reimbursement program or the Company, the Company could be materially
impacted by unfavorable changes in the future should they occur.
<PAGE>
d) Other Reimbursement Changes
The Company derives substantial portions of its revenues from third-party
payors, including government reimbursement programs such as Medicare and
Medicaid, and non-government sources such as commercial insurance companies,
HMOs, PPOs and contract services. These payors have undertaken
cost-containment measures designed to limit payments to health care providers.
There can be no assurance that payments under these programs will be sufficient
to cover the costs allocable to patients eligible for reimbursement. The
Company cannot predict whether and what additional proposals or cost
containment measures will be adopted or, if adopted, what effect, if any, such
proposals might have on the operations of the Company.
e) Competition
The Company competes with numerous well-established competitors which have
substantially greater financial resources than the Company. Competitors are
increasingly focusing attention on providing alternative site health care
services, specifically on adult day health services. Such increasing
competition may adversely affect revenues and profitability of Company
operations.
f) Insurance
The Company believes its present insurance coverage is adequate. However, there
can be no assurance that such insurance will be available, or, if available,
that such insurance will be either adequate to cover the Company's liabilities
or available at affordable rates. In addition, increasing insurance costs, and
the increasing unwillingness of insurance companies to insure against certain
types of losses, raise some questions as to whether the Company will be able to
obtain or continue its present insurance coverage. The inability to obtain
adequate insurance coverage at affordable rates, or a loss of existing
coverage, could have a material effect on the Company.
g) Private Payment Sources
The Company's future operating results may be dependent in part upon its
ability to attract customers able to pay for the Company's charges from their
own and their families' financial resources. Circumstances which adversely
affect the ability or desire of seniors to pay for the Company's services could
have an adverse effect on the Company. In the event that the Company
encounters difficulty in attracting seniors with adequate resources to pay for
the Company's services, the Company would be adversely affected.
h) Acquisitions
The Company seeks to establish and increase market share through acquisitions
in existing and new markets. The Company evaluates potential acquisition
candidates that would complement or expand its current services. In attempting
to make acquisitions, the Company competes with other providers, some of which
have greater financial resources than the Company. Management currently
believes that acquisition candidates meeting the criteria of its acquisition
strategy will continue to be identified in the future and certain of these
candidates will be acquired by the Company. However, there can be no assurance
that suitable acquisitions will continue to be identified or that acquisitions
can be consummated on acceptable terms. See separate cautionary statement
regarding financing.
i) Inclement Weather
The Company provides its services to individuals in home and community
settings. Severe weather such as snow and hurricanes may hinder the Company's
ability to provide its services and thus impact operating results.
j) Year 2000 Computer 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 relies
upon numerous computer systems to operate its business and has implemented a
plan to evaluate and address its year 2000 issues.
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
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's cash flows, financial position or results of operations.
<PAGE>
The 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.
This could in turn lead to an interruption or a failure of certain normal
business activities or operations. 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.
k) Financing
The Company's ability to pursue its strategic plan is dependent upon its
ability to obtain financing on satisfactory terms and conditions. If the
Company is unable to obtain satisfactory financing it would have an adverse
impact on the Company's liquidity and its ability to execute its development
plans.
l) ADC Development
During fiscal 2000, the Company plans to develop new adult day health centers
after which the Company plans to continue development efforts at a similar or
accelerated pace. The Company's ability to achieve its development plans will
depend upon a variety of factors, many of which are beyond the Company's
control. There can be no assurance that the Company will not suffer delays in
its development program, which could slow the Company's growth. The successful
development of additional operations will involve a number of risks including
the possibility that the Company may be unable to locate suitable sites at
acceptable prices or may be unable to obtain, or may experience delays in
obtaining, necessary zoning, land use, building, occupancy, licensing and other
required governmental permits and authorizations. The implementation of the
Company's development strategy is also dependent upon the Company's
profitability, the financial performance of its adult day care operations, the
availability of financing and the other Cautionary Statements listed above.
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices are located in Louisville, Kentucky in
approximately 24,000 square feet of space leased from an unaffiliated party.
The Company has 53 real estate leases ranging from approximately 200 to 24,000
square feet of space in their respective locations. The Company believes that
its facilities are adequate to meet its current needs, and that additional or
substitute facilities will be available if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, is subject to claims and suits arising in the
ordinary course of its business, including claims for damages for personal
injuries. In the opinion of management, the ultimate resolution of any of
these pending claims and legal proceedings will not have a material effect on
the Company's financial position or results of operations.
On January 26, 1994 Franklin Capital Associates L.P., Aetna Life and Casualty
Company and Aetna Casualty and Surety Company, shareholders, who at one time
held approximately 320,000 shares of the Company's common stock (approximately
13% of shares outstanding) filed suit in Chancery Court of Williamson County,
Tennessee claiming unspecified damages not to exceed three million dollars in
connection with registration rights they received in the Company's acquisition
of National Health Industries in February 1991. The suit alleges the Company
failed to use its best efforts to register the shares held by the plaintiffs as
required by the merger agreement. The Company believes it has meritorious
defenses to the claims and does not expect that the ultimate outcome of the
suit will have a material impact on the Company's results of operations,
liquidity or financial position. The Company plans to vigorously defend its
position in this case. No amounts have been recorded in the accompanying
financial statements related to this suit.
In January 1997, Aetna Life and Casualty Company withdrew its claim against the
Company without prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was traded on the National Market System of the
NASDAQ Stock Market through March 10, 1999. Since March 11, 1999 the Company's
common stock has been traded on the NASDAQ SmallCap System. The stock was
traded under the symbol "CTND on both systems. Set forth below are the high
and low sale prices for the common stock for the periods indicated reported by
NASDAQ:
<TABLE>
<CAPTION>
Quarter Ended: High Low
--------------------- -------- -------
<S> <C> <C>
June 30, 1997 $ 8.88 $5.50
September 30, 1997 $ 8.38 $7.13
December 31, 1997 $10.69 $7.00
March 31, 1998 $ 8.88 $7.00
June 30, 1998 $ 7.94 $5.50
September 30, 1998 $ 5.50 $1.75
December 31, 1998 $ 3.75 $2.25
March 31, 1999 $ 4.13 $1.78
</TABLE>
On July 10, 1999, the last reported sale price for the Common Stock reported by
NASDAQ was $2.31 and there were approximately 690 holders of record of the
Company's Common Stock. No cash dividends have been paid by the Company.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from the
consolidated financial statements of the Company for the periods and at the
dates indicated. This information has been restated to reflect the Company's 1
for 5 reverse stock split as further explained in Note 1 to the consolidated
financial statements of the Company. The information is qualified in its
entirety by and should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this and prior year Form
10-Ks.
<TABLE>
<CAPTION>
Consolidated Selected Financial Information
--------------------------------------------
Year Ended March 31,
(Dollar amounts in 000's ------------------------------------------------
except per share data) 1999 1998 1997 1996 1995
- ------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Results of Operations
Net revenues $97,162 $95,183 $76,773 $63,227 $60,836
Net Income (loss) $(6,228) $ 1,412 $ 1,759 $ 1,575 $ 1,248
Per share:
Basic:
Number of shares 3,120 3,120 3,119 3,119 3,119
Net Income (loss) $(2.00) $ .45 $ .56 $ .50 $ .40
Diluted:
Number of shares 3,120 3,162 3,142 3,149 3,145
Net Income (loss) ($2.00) $ .45 $ .56 $ .50 $ .40
</TABLE>
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------
Balance sheet Data as of: 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital $ 9,529 $10,908 $17,471 $13,844 $11,641
Total assets 42,762 49,533 38,745 33,217 31,073
Long term liabilities 13,562 11,962 10,689 6,805 7,094
Total liabilities 26,907 27,450 18,081 14,313 13,744
Stockholders' equity 15,855 22,083 20,663 18,904 17,329
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 1999 Compared With Fiscal Year Ended March 31, 1998
<TABLE>
<CAPTION>
Operating Data
for the Years Ended March 31,
(amounts in thousands)
1 9 9 9 1 9 9 8 Change
-------------------- -------------------- --------------------
% of % of
Amount Revenues Amount Revenues Amount %
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues
Adult Day Health Services $38,379,200 39.5% $30,490,266 32.0% $ 7,888,934 25.9%
Visiting Nurses 35,665,505 36.7% 39,949,555 42.0% (4,284,050) (10.7%)
Product Operations 21,516,783 22.2% 20,926,303 22.0% 590,480 2.8%
Contract Management 1,600,155 1.6% 3,816,476 4.0% (2,216,321) (58.1%)
----------- ----------- ------------
$97,161,643 100.0% $95,182,600 100.0% $ 1,979,043 2.1%
----------- ----------- ------------
Cost of Sales and Services
Adult Day Health Services 32,976,570 85.9% 27,324,010 89.6% 5,652,560 20.7%
Visiting Nurses 33,681,168 94.4% 35,816,410 89.7% (2,135,242) (6.0%)
Product Operations 15,811,037 73.5% 15,204,347 72.7% 606,690 4.0%
Contract Management 299,400 18.7% 740,613 19.4% (441,213) (59.6%)
----------- ----------- ------------
82,768,175 85.2% 79,085,380 83.1% 3,682,795 4.7%
----------- ----------- ------------
Segment Contribution
Adult Day Health Services 5,402,630 14.1% 3,166,256 10.4% 2,236,374 70.6%
Visiting Nurses 1,984,337 5.6% 4,133,145 10.4% (2,148,808) (52.0%)
Product Operations 5,705,746 26.5% 5,721,956 27.3% (16,210) (0.3%)
Contract Management 1,300,755 81.3% 3,075,863 80.6% (1,775,108) (57.7%)
----------- ----------- ------------
14,393,468 14.8% 16,097,220 16.9% (1,703,752) (10.6%)
----------- ----------- ------------
Selling,General &
Administrative 10,632,747 10.9% 10,117,882 10.6% 514,865 5.1%
Depreciation and
Amortization 2,414,472 2.5% 2,582,653 2.7% (168,181) (6.5%)
Interest, Net 1,561,916 1.6% 993,602 1.0% 568,314 57.2%
Income (Loss) Before Taxes,
Non-recurring items and ----------- ----------- ------------
accounting change (215,667) (0.2%) 2,403,083 2.5% (2,618,750) (109.0%)
Non-recurring items:
Restructuring Charges 550,000 - 550,000
Goodwill write-down 6,967,560 - 6,967,560
Loss on Disposal of
Certain Operations 1,648,538 - 1,648,538
Litigation Settlement
Charge (Gain) (1,350,000) - (1,350,000)
Income (Loss) Before
Taxes, and Accounting ----------- ----------- -------------
Change $(8,031,765) $ 2,403,083 $(10,434,848) (434.2%)
=========== =========== =============
</TABLE>
<PAGE>
Adult Day Health Services
- -------------------------
Net revenues increased 26% to $38.4 million from $30.5 million as a result of
a) $5.5 million or 18% growth in same store sales and b) $2.4 million from
acquired operations. Same store sales growth came primarily from volumes which
grew to 469,695 patient days in 1999 from 415,246 in 1998. Average revenue per
day of care increased approximately 4% as a result of pricing (1.5% increase)
and mix changes. Total patient days including acquired operations grew by 27%
to 544,283 in 1999 from 427,205 in 1998.
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.
Visiting Nurses
- ---------------
Net revenues decreased by $4.3 million or 11% primarily due to the impact of
the Balanced Budget Act of 1997 (BBA) and the related Interim Payment System
(IPS) on the Company's 12 Medicare-certified home health agencies. This was
partially offset by approximately $1.1 million resulting from the favorable
settlement of prior years' cost reports. Volumes declined by 23% to 464,108
visits in 1999 from 602,815 visits in 1998. Of the total $35.7 million of
revenues in this segment approximately $32.7 million or 92% is derived from
cost reimbursed programs. Average reimbursement per visit increased 16% due to
the lower volumes as certain fixed costs were spread over a smaller base of
business. The Company incurred costs in excess of Medicare IPS limits of $2.6
million, or approximately 7%, while IPS had the effect of reducing the limits
by approximately 15% from 1998 levels.
Cost of sales and services in total declined 6% to $33.7 million in 1999 from
$35.8 million in 1998. However, due to the more rapid decline in revenues
explained above, cost of sales and services as a percent of revenues increased
to 94% in 1999 from 90% in 1998.
Product Operations
- -------------------
Net revenues increased by $590,480 or 3% due to improved product mix partially
offset by the impact of the BBA's cuts in Medicare reimbursement for oxygen
therapy services. Volumes decreased by 4% to 394,171 units of service in 1999
from 408,752 in 1998 due to the closure of the Boston operation in January 1999
and an intentional reduction in low margin products. As a result of the
decrease in low margin products average reimbursement per unit increased 7%.
Under the BBA, Medicare reimbursement for oxygen therapy services was reduced
by 25% on January 1, 1998 and an additional 5% on January 1, 1999. As a
result, net revenues and pre-tax income for the years ended March 31, 1999 and
1998 were lower by $1 million and $250,000, respectively, than they would have
been had the reductions not taken place.
Cost of sales and services in total increased $606,690 or 4% due to a shift
toward higher cost therapies, partially offset by lower volumes. Average cost
of sales and services per unit increased by 8% primarily due to changes in the
mix of product sold. Due to the combination of lower Medicare reimbursement
for oxygen therapy services explained above, and the impact favorable mix
changes, cost of sales and services as a percent of revenues increased to 73.5%
in 1999 from 72.7% 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. The Company
performed management services pursuant to management agreements scheduled to
expire in February and June 2000. On September 30, 1998 Columbia/HCA sold the
agencies to a third party and notified the Company that its services would no
<PAGE>
longer be needed for home health visits performed after that date.
Accordingly, revenues and cost of sales and services both declined by
approximately 60% in 1999 from 1998 due to termination of the contract.
In October 1998, the Company entered into litigation with Columbia/HCA arising
from the management agreements between the parties. In December, 1998 the
parties reached an agreement under which Columbia/HCA has paid 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 offsets the estimated costs of providing the wind-down
services. The balance of $1,350,000 ($793,000 or $.25 per share after tax) was
recognized as a non-recurring litigation settlement gain in the third quarter.
As of March 31, 1999 $375,000 remained in an escrow account and was
subsequently collected by June 1999.
Selling, General and Administrative
- -----------------------------------
The increase of $514,865 is due primarily to an increase in certain
administrative staff levels and costs incurred related to the Company's
geographic expansion. Approximately $410,000 or 80% of that increase was
incurred prior to the Company's July 1998 down-sizing in response to reduced
Medicare reimbursements legislated in the BBA. SG&A as a percent of revenues
increased slightly due to the higher level of costs incurred earlier in the
year.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization declined by 6.5% or $168,181, 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 increase in interest and other, net is primarily a result of higher average
outstanding debt levels associated with the Company's operating results and
acquisition and expansion activities undertaken towards the end of fiscal 1998.
Income Taxes
- ------------
As of March 31, 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 management's estimation of realizability of those assets
through future taxable income. This valuation was based in large part on the
Company's history of generating operating income or losses, individual tax
locales and expectations for the future. The Company's 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. 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 net deferred tax assets as of March 31, 1999
and 1998.
The effective income tax rate was a benefit of approximately 27% of loss before
income taxes for 1999 as compared to an effective income tax rate of
approximately 41% of income before taxes for 1998. The benefit in 1999
resulted directly from the recognition of losses incurred from continuing
operations.
<PAGE>
Non-recurring Items
- -------------------
Restructuring Charges
In July 1998 the Company executed a restructuring plan including work force
reduction, branch closings, and changes in compensation programs. The Company
recorded a pretax charge of $550,000 in the second quarter of fiscal 1999
related to restructuring activities. The charge included approximately
$412,0000 for work force reductions, $84,000 for branch closing costs and
$54,000 for work force reorganization. As of March 31, 1999, the Company has a
restructuring reserve balance of approximately $12,000 which is primarily
comprised of amounts related to branch closings.
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 management's estimate of the impact of the
changes in Medicare reimbursement for home health nursing services. Management
determined that this impact indicated the carrying value of goodwill should be
written down by approximately $7 million based on the net present value of
expected future cash flows of specific acquired (primarily Medicare) nursing
operations. This write-down is reflected in the accompanying consolidated
statement of operations.
Loss on Disposal of Certain Operations
In the fourth quarter, the Company completed the sale of its Richmond, VA
nursing operations to Olsten Corp, a national home health provider, and in a
separate action closed its Boston, MA home medical equipment operations. These
activities resulted in a $1.6 million charge shown in the table above. The
effected operations generated revenues of $4.1 million and contributed pre-tax
losses of $390,000 in the year ended March 31, 1999 and $4.7 million in
revenues and $254,000 of pre-tax income in the year ended March 31, 1998.
Litigation Settlement Gain
Please refer to "Contract Management Services" above.
<PAGE>
Fiscal Year Ended March 31, 1998 Compared With Fiscal Year Ended March 31, 1997
<TABLE>
<CAPTION>
Operating Data
for the Years Ended March 31,
(amounts in thousands)
1 9 9 8 1 9 9 7 Change
-------------------- -------------------- --------------------
% of % of % of
Amount Revenues Amount Revenues Amount Revenues
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues
Adult Day Care Services $30,490,266 32.0% $25,184,977 32.8% $ 5,305,289 21.1%
Visiting Nurses 39,949,555 42.0% 29,438,144 38.3% 10,511,411 35.7%
Product Operations 20,926,303 22.0% 18,826,917 24.5% 2,099,386 11.2%
Contract Management 3,816,476 4.0% 3,323,001 4.3% 493,475 14.9%
----------- ----------- -----------
95,182,600 100.0% 76,773,039 100.0% 18,409,561 24.0%
----------- ----------- -----------
Cost of Sales and Services
Adult Day Care Services 27,324,010 89.6% 21,554,781 85.8% 5,769,229 26.8%
Visiting Nurses 35,816,410 89.7% 26,317,182 89.4% 9,499,228 36.1%
Product Operations 15,204,347 72.7% 13,788,459 73.2% 1,415,888 10.3%
Contract Management 740,613 19.4% 823,923 24.8% (83,310) (10.1%)
----------- ----------- -----------
79,085,380 83.1% 62,484,345 81.4% 16,601,035 26.6%
----------- ----------- -----------
Segment Contribution
Adult Day Care Services 3,166,256 10.4% 3,630,196 14.4% (463,940) (12.8%)
Visiting Nurses 4,133,145 10.4% 3,120,962 10.6% 1,012,183 32.4%
Product Operations 5,721,956 27.3% 5,038,458 26.8% 683,498 13.6%
Contract Management 3,075,863 80.6% 2,499,078 75.2% 576,785 23.1%
----------- ----------- -----------
16,097,220 16.9% 14,288,694 18.6% 1,808,526 12.7%
----------- ----------- -----------
Selling, General &
Administrative 10,117,882 10.6% 9,363,031 12.2% 754,851 8.1%
Depreciation and
Amortization 2,582,653 2.7% 2,239,194 2.9% 343,459 15.3%
Interest, Net 993,602 1.0% 771,099 1.0% 222,503 28.9%
----------- ----------- -----------
Income (Loss) Before Taxes $ 2,403,083 2.5% $ 1,915,370 2.5% $ 487,713 25.5%
=========== =========== ===========
</TABLE>
Adult Day Health Services
- -------------------------
Net revenues increased 21% to $30.5 million from $25.2 million as a result of
a) $1.4 million or 6% growth in same store sales, b) $606,000 from acquired
operations and, c) $3.4 million from startup operations. Same store sales
growth came primarily from volumes which grew 9% to 359,808 patient days in
1998 from 330,691 in 1997. Average revenue per day of care increased
approximately 1% as a result of mix changes. Total patient days including
acquired and startup operations increased 24% to 424,861 in 1998 from 343,111
in 1997.
Cost of sales and services as a percent of revenues increased to 90% in 1998
from 86% in 1997 primarily as a result of increased costs associated with new
units started in late 1997 and early 1998 and the resulting lower overall
occupancy rates for in-facility care.
Visiting Nurses
- ---------------
Net revenues increased by $10.5 million or 36% due to a) $3.8 million from the
acquisition of two Florida-based agencies in January 1998, b) $3.4 million from
startup agencies and c) $3.3 million in same store revenue growth. Same store
<PAGE>
volumes increased by 15% to 535,173 visits in 1998 from 466,331 visits in 1997.
Of the total $39.9 million of revenues in this segment approximately $37.4
million or 94% was derived from cost reimbursed programs. Total visits grew
32% to 624,815 in 1998 from 473,165 in 1997. Substantially all of the
Company's agencies operated under the Medicare cost limits during 1998.
Cost of sales and services in total increased 36% to $35.8 million in 1998 from
$26.3 million in 1997, primarily as a result of the acquisitions, startups and
same store growth discussed above. Cost of sales and services as a percent of
revenues increased to 90% in 1998 from 89% in 1997 primarily due to the
addition of the higher cost start-up and acquired agencies in 1998.
Product Operations
- ------------------
Net revenues increased by $2.1 million or 11.2% due to higher volumes partially
offset by lower pricing as downward pricing pressure from payors continued, and
due to changes in product mix. Volumes increased by 18% to 408,752 units of
service in 1998 from 347,766 in 1997. Average reimbursement per unit declined
5%. Under the BBA, Medicare reimbursement for oxygen therapy services was
reduced by 25% on January 1, 1998 and was reduced an additional 5% on January
1, 1999. As a result, net revenues and pre-tax income for the year ended March
31, 1998 were $250,000 lower than they would have been had the reductions not
taken place.
Cost of sales and services in total increased 10.3% to $15.2 million in 1998
from $13.8 million in 1997. Average cost of sales and services per unit
declined by 6% due to steps taken by the Company to improve operating margins
and changes in the mix of product. As a result, costs of sales and services as
a percent of revenues declined to 72.7% in 1998 from 73.2% in 1997 despite the
partially offsetting impact of the lower Medicare oxygen reimbursement rates
discussed above.
Contract Management Services
- ----------------------------
Net revenues increased 14.9% to $3.8 million in 1998 from $3.3 million in 1997
on a volume increase of 21%. Average revenue per unit declined 5% due to the
effects of a graduated rate scale.
Cost of Sales and Services dropped slightly due to improved operating
efficiencies in managing the agencies.
Selling, General and Administrative
- -----------------------------------
The increase of $754,851 is due primarily to an increase in certain
administrative staff levels and costs incurred related to the Company's
geographic expansion. SG&A as a percent of revenues declined due to growth in
operations.
Depreciation and Amortization
- -----------------------------
The increase of $343,459 is primarily due to capital investments made by the
Company. These capital investments principally relate to geographic expansion
and replacement of certain medical equipment.
Interest, Net
- -------------
The increase in interest and other, net is primarily a result of higher average
outstanding debt levels associated with the Company's acquisition and expansion
activities.
Income Taxes
- ------------
As of March 31, 1998, the Company has net deferred tax assets of approximately
$690,000. The net deferred tax asset is composed of $88,000 of current
deferred tax assets and $602,000 of long-term deferred tax assets. Prior to
1997 the Company had provided a valuation allowance against net deferred tax
<PAGE>
assets based upon management's estimation of realizability of those assets
through future taxable income. This valuation was based in large part on the
Company's history of generating operating income or losses and expectations (at
that time) for the future. Over time the Company demonstrated an ability to
generate operating income such that it became more likely than not that the
deferred tax assets would be realized through future taxable income and, in
accordance with generally accepted accounting principles for income tax
accounting, in 1997 the valuation allowance was removed. The Company's 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. 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 March
31, 1998.
The effective income tax rate was approximately 41% and 8% of income before
taxes for 1998 and 1997 respectively. This difference was due primarily to the
reduction of the Company's valuation allowance in 1997 as described above.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Revolving Credit Facility
- -------------------------
The Company has $18 million in credit facilities, comprised of $15 million with
the Healthcare Financial Services Division of Heller Financial, Inc.
(approximately $12.5 million and $11.0 million outstanding at March 31, 1999
and 1998 respectively) and a $3 million demand note 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 1/2 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 March 31, 1999, the Company had total cash and unused borrowings of
approximately $2.5 million. The Heller facility remains in effect until
October 13, 2000 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. As of March 31, 1999, the
Company was in default of certain financial covenants of the Heller facility,
however, Heller has waived these defaults.
The Company has a commitment from Bank One for a new $20 million credit
facility (to replace the existing facilities) which is expected to be in place
prior to August 31, 1999. 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 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 1997
- --------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Provided by (used in)
Operating activities $ (11) $ 4,129 $ (302)
Investing activities (1,142) (8,457) (3,706)
Financing activities 1,368 4,138 3,462
--------- --------- ---------
Net Change in Cash and Cash Equivalents $ 214 $ (190) $ (546)
========= ========= =========
</TABLE>
1999
- ----
Net cash used by operating activities of approximately $11,000 resulted
principally from current period loss, 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. The decrease in accounts payable and accrued liabilities
resulted principally from the satisfaction of certain liabilities assumed
in the acquisitions made in late 1998. Net cash used in investing
activities of approximately $1.1 million 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 Company's information systems. Net cash provided by financing
activities of approximately $1.4 million resulted primarily from
borrowings in the Company's credit facility.
<PAGE>
1998
- ----
Net cash provided by operating activities of approximately $4.1 million
resulted principally from current period earnings net of changes in
accounts receivable, accounts payable and accrued expenses. Net cash used
in investing activities of approximately $8.5 million 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
$4.1 million resulted primarily from an increase in the Company's credit
facility related to investments made in acquisitions and geographic
expansion.
1997
- ----
Net cash used by operating activities of approximately $302,000 resulted
principally from current period earnings net of changes in accounts receivable,
accounts payable and accrued expenses. Net cash used in investing activities
of approximately $3.7 million 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 $3.4 million resulted
primarily from an increase in the Company's 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 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 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 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 HMO's. 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
<PAGE>
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 will be 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
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 of this report on Form 10K, the notes to
the accompanying financial statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations 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
<PAGE>
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.
Oxygen Reimbursement
Medicare reimbursement for certain oxygen therapy services and products was cut
25% for services provided on or after January 1, 1998 and an additional 5% cut
took effect on January 1, 1999. Future increases have been tied to the
Consumer Price Index and will not resume until 2003. Revenues and pre-tax
income for the years ended March 31, 1999 and 1998 were approximately $1
million and $250,000, respectively, lower than they would have been had this
reimbursement reduction not taken place.
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 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 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. 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.
The Company believes that IPS is causing a contraction of Medicare home health
operations nationwide and is, despite Congressional intentions and HCFA
assurances to the contrary, a reduction of the Medicare home care benefit.
Visits performed by the Company for Medicare beneficiaries declined from
523,000 in 1998 to 350,000 in 1999 for a reduction of approximately 33%.
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, 1998, the
Company has experienced a decline in census, volumes, and length of stay
commensurate with the expectations outlined above. As a result, the Company
experienced a decline in revenues and contribution from this portion of its
operations (which incurred costs of approximately $2.6 million in excess of the
new Medicare reimbursement limits during fiscal 1999).
<PAGE>
In July 1998, the Company executed a restructuring plan including work force
reduction, branch closings, and changes in compensation programs designed to
lower its operating costs and recorded a related charge of $550,000 before
taxes for severance, branch closings and other non-recurring expenses. As a
part of this restructuring program, 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 will be in
effect for the Company's fiscal year ending March 31, 2000 that are
approximately 9% higher than the limits in place during fiscal 1999. The
Company's operating costs exceeded limits by approximately 7% in the fiscal
year ended March 31, 1999. For the year ended March 31, 1999 revenues subject
to IPS were $28.7 million or 29.5% of total revenues compared to $34.0 million
and 35.7% in the year ended March 31, 1998.
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 7a. 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 March 31, 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net revenues $97,161,643 $95,182,600 $76,773,039
Cost of sales and services 80,430,802 76,450,395 60,268,808
Selling, general and administrative expenses 10,632,747 10,117,882 9,363,031
Depreciation and amortization expense 2,414,472 2,582,653 2,239,194
Provision for uncollectible accounts 2,337,373 2,634,985 2,215,537
Restructuring charges 550,000 - -
Goodwill write-down 6,967,560 - -
Loss on disposal of certain operations 1,648,538 - -
Litigation settlement gain (1,350,000) - -
------------ ------------ -------------
Income (loss) before other income (expense)
and income taxes (6,469,849) 3,396,685 2,686,469
Other income (expense):
Interest expense (1,561,916) (993,602) (771,099)
------------ ------------ -------------
Income (loss) before provision for
income taxes (8,031,765) 2,403,083 1,915,370
Provision (benefit) for income taxes (2,186,613) 991,272 156,000
------------ ------------ -------------
Net income before cumulative effect of
a change in accounting principle (5,845,152) 1,411,811 1,759,370
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs, net of tax (382,515) - -
------------ ------------ -------------
Net income (loss) $(6,227,667) $ 1,411,811 $ 1,759,370
============ ============ =============
Per share amounts
Average shares outstanding - basic 3,120,436 3,120,436 3,119,413
Average shares outstanding - diluted 3,120,436 3,161,706 3,141,865
Net income before cumulative effect of a
change in accounting principle $ (1.88) $ 0.45 $ 0.56
Cumulative effect on prior years of a
change in method accounting for
pre-opening costs, net of tax (0.12) - -
------------ ------------ -------------
Net income (loss) $ (2.00) $ 0.45 $ 0.56
============ ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,038,751 $ 824,293
Accounts receivable - net of allowance
for uncollectible accounts of approximately
$3,322,000 and $3,691,000 respectively 20,463,414 23,832,574
Prepaid expenses and other current assets 1,371,719 1,649,579
Deferred tax assets - 88,635
------------- -------------
TOTAL CURRENT ASSETS 22,873,884 26,395,081
PROPERTY AND EQUIPMENT - net 7,453,204 7,752,103
COST IN EXCESS OF NET ASSETS ACQUIRED - net
of accumulated amortization of approximately
$1,720,000 and $1,719,000, respectively 7,394,238 13,514,130
DEFERRED TAX ASSETS 4,137,000 601,365
OTHER ASSETS 903,639 1,269,944
------------- -------------
TOTAL ASSETS $ 42,761,965 $ 49,532,623
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,548,648 $ 12,139,101
Current portion of term debt 3,122,749 3,248,185
Other current liabilities 673,000 100,000
------------- -------------
TOTAL CURRENT LIABILITIES 13,344,397 15,487,286
------------- -------------
LONG-TERM LIABILITIES:
Revolving credit facility 12,530,258 11,038,646
Term debt 574,610 197,184
Other liabilities 457,474 726,614
------------- -------------
TOTAL LONG-TERM LIABILITIES 13,562,342 11,962,444
------------- -------------
TOTAL LIABILITIES 26,906,739 27,449,730
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
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 (9,707,429) (3,479,762)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 15,855,226 22,082,893
------------- -------------
$ 42,761,965 $ 49,532,623
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Total
------------------- ----------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- -------- ------ --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 3,129,436 $312,944 10,000 $(95,975) $25,337,876 $(6,650,943) $18,903,902
Net Income - - - - - 1,759,370 1,759,370
--------- -------- ------ --------- ----------- ------------ ------------
Balance, March 31, 1997 3,129,436 $312,944 10,000 $(95,975) $25,337,876 $(4,891,573) $20,663,272
Options Exercised 1,000 100 - - 7,710 - 7,810
Net Income - - - - - 1,411,811 1,411,811
--------- -------- ------ --------- ----------- ------------ ------------
Balance, March 31, 1998 3,130,436 $313,044 10,000 $(95,975) $25,345,586 $(3,479,762) $22,082,893
Net Loss - - - - - (6,227,667) (6,227,667)
--------- -------- ------ --------- ----------- ------------ ------------
Balance, March 31, 1999 3,130,436 $313,044 10,000 $(95,975) $25,345,586 $(9,707,429) $15,855,226
--------- -------- ------ --------- ----------- ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,227,667) $ 1,411,811 $ 1,759,370
Adjustments to reconcile net income to net
cash provided by (used in)
Operating activities:
Depreciation and amortization 2,414,472 2,582,653 2,239,194
Provision for uncollectible accounts 2,337,373 2,634,985 2,215,537
Goodwill write-down 6,967,560 - -
Loss on disposal of certain operations 1,648,538 - -
Cumulative effect of change in accounting
principle 651,090 - -
Deferred income taxes (2,774,000) 574,000 (192,000)
Other (250,000) - -
------------ ------------ ------------
4,767,366 7,203,449 6,022,101
Change in certain net current assets,
net of the effects of acquisitions
and dispositions
(Increase) decrease in:
Accounts receivable (1,495,526) (6,143,660) (5,455,101)
Prepaid expenses and other current assets 237,059 171,743 (274,784)
Other assets (560,135) (199,344) (551,245)
Increase (decrease) in:
Accounts payable and accrued expenses (2,590,453) 3,158,029 156,628
Other liabilities (369,140) (61,443) (199,978)
Net cash provided by (used in) ------------ ------------ ------------
operating activities (10,829) 4,128,774 (302,379)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (2,393,225) (4,017,796) (2,620,942)
Proceeds from sale of assets 1,415,000 - -
Acquisitions, net of cash acquired (164,090) (4,439,746) (1,084,846)
Net cash (used in) provided by ------------ ------------ ------------
investing activities (1,142,315) (8,457,542) (3,705,788)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on term debt (124,010) (163,549) (441,202)
Net revolving credit facility borrowings 1,491,612 4,302,006 3,902,932
Net cash provided by (used in) ------------ ------------ ------------
financing activities 1,367,602 4,138,457 3,461,730
------------ ------------ ------------
Net (decrease) increase in cash 214,458 (190,311) (546,437)
Cash and cash equivalents at beginning of year 824,293 1,014,604 1,561,041
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,038,751 $ 824,293 $ 1,014,604
============ ============ ============
Cash Paid for:
Interest $ 1,541,000 $ 1,049,000 $ 691,000
Taxes $ 175,000 $ 197,000 $ 52,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
BASIS OF CONSOLIDATION AND DESCRIPTION OF BUSINESS
- --------------------------------------------------
The consolidated financial statements include the accounts of Caretenders
Health Corp. and its wholly-owned subsidiaries ("the Company"). 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.
All material intercompany transactions and accounts have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
- -------------------------
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Uninsured deposits at March 31, 1999, and 1998 were approximately $939,000 and
$724,000, respectively.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives. The estimated useful
lives of depreciable assets are as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C>
Buildings and improvements 30
Leasehold improvements 3-10
Medical equipment 2-10
Office and other equipment 3-10
Transportation equipment 3-5
</TABLE>
Included in property and equipment is rental equipment which may be sold. Upon
sale, the cost net of related accumulated depreciation is charged to costs of
sales and services.
COST IN EXCESS OF NET ASSETS ACQUIRED
- -------------------------------------
The costs in excess of fair value of net assets acquired are stated at cost and
amortized on a straight-line basis over their estimated useful lives which
range from 20 (approximately $1.2 million, net) to 40 years (approximately $6.2
million, net).
Subsequent to its acquisitions, the Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated for
<PAGE>
possible impairment, the Company utilizes appropriate methods (such as
discounted cash flows over the remaining life of the goodwill), in measuring
whether or not the goodwill is recoverable.
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 market place and the Company. The write-down of goodwill was
required under Statement of Financial Accounting Standard No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of", based upon management's estimate of the impact of the
changes in Medicare reimbursement for home health nursing services. Management
determined that this impact indicated the carrying value of goodwill should be
written down by approximately $7 million based on the net present value of
expected future cash flows of specific acquired (primarily Medicare) nursing
operations. This write-down is reflected in the accompanying consolidated
statements of operations.
CAPITALIZATION POLICIES
- -----------------------
Maintenance, repairs and minor replacements are charged to expense as incurred.
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is recognized in income.
Construction costs incurred to ready a project for its intended use are
capitalized for major development projects and are amortized over the lives of
the related assets.
PREOPENING COSTS
- ----------------
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. The Company had previously deferred
such costs and amortized them over a period of 24 months, which was permissible
previous to the issuance of SOP 98-5. Accordingly, the accompanying statement
of operations for the year ended March 31, 1999 includes a non-recurring, net
of tax, expense of approximately $383,000 for the cumulative effect of this
change in accounting principle. This consisted of a $651,000 write-off of
assets net of a $268,000 tax benefit.
NET REVENUES
- ------------
The Company is paid for its services primarily by federal and state third-party
reimbursement programs, commercial insurance companies, and patients. Revenues
are recorded at established rates in the period during which the services are
rendered. Appropriate allowances to give recognition to third party payment
arrangements are recorded when the services are rendered.
Approximately 67%, 68%, and 66%, of net revenues for the fiscal years ended
March 31, 1999, 1998, and 1997, respectively, were derived under federal and
state third-party reimbursement programs. These revenues are based, in part,
on cost reimbursement principles and are subject to examination and retroactive
adjustment by agencies administering the programs Approximately 34%, 39%, and
34%, of net revenues for the fiscal years ended March 31, 1999, 1998, and
1997, respectively, were derived from cost reimbursed programs. Management
continuously evaluates the outcome of these reimbursement examinations and
<PAGE>
provides allowances for losses based upon the best available information. Net
revenues for the year ended March 31, 1999 included approximately $1.1 million
resulting from the favorable settlement of prior years' Medicare cost reports.
In the opinion of management, adjustments, if any, would not be material to the
financial position or the results of operations of the Company.
The ability of payors to meet their obligations depends upon their financial
stability, future legislation and regulatory actions. The Company does not
believe there are any significant credit risks associated with receivables from
federal and state third-party reimbursement programs. The allowance for
doubtful accounts principally consists of management's estimate of amounts that
may prove uncollectible from non-governmental payors.
NET INCOME (LOSS) PER SHARE
- ---------------------------
Net income per share is presented as a unit of basic shares outstanding and
diluted shares outstanding. Diluted shares outstanding is computed based on
the weighted average number of common shares and common equivalent shares
outstanding. Common equivalent shares result from dilutive stock options and
warrants. The following table is a reconciliation of basic to diluted shares
used in the earnings per share calculation:
<TABLE>
<CAPTION>
For the Fiscal Years Ended March 31,
-----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic outstanding shares at year end 3,120,436 3,120,436 3,119,436
Add-common equivalent shares representing shares
issuable upon exercise of dilutive options
and warrants -0-(a) 41,270 22,429
---------- ---------- ----------
Diluted weighted average number of shares at year end 3,120,436 3,161,706 3,141,865
========== ========== ==========
</TABLE>
(a) Due to the net loss incurred in fiscal 1999, common equivalent shares are
excluded due to their anti-dilutive effect.
REVERSE STOCK SPLIT
- -------------------
On March 22, 1995, the shareholders approved and implemented a one (1) for five
(5) reverse stock split. Simultaneously, the par value per common share
changed from $.02 per share to $.10.
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. Refer also to the notes "NET
REVENUES" and "HEALTHCARE REFORM LEGISLATION, REGULATIONS AND MARKET
CONDITIONS".
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The Company's financial instruments consist of cash, accounts receivable and
payable and debt instruments. The book values of cash and accounts receivable
and payable are considered representative of their respective fair values. The
fair value of the Company's debt instruments approximate their carrying values
as substantially all of such debt has rates which fluctuate with changes in
market rates.
FINANCIAL STATEMENT RECLASSIFICATIONS
- -------------------------------------
Certain amounts have been reclassified in the 1998 and 1997 financial
statements in order to conform them to the 1999 presentation. Such
reclassifications had no effect on previously reported net income
NEW ACCOUNTING PRONOUNCEMENT
- ----------------------------
Effective April 1, 1999, the Company adopted Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 identifies the characteristics of internal-use
software and specifies that once the preliminary project stage is complete,
external direct costs, certain direct internal payroll and payroll-related
costs and interest costs incurred during the development of computer software
for internal use should be capitalized and amortized. For the year ended March
31, 1999, the Company capitalized approximately $450,000 of internally
developed software costs and third party software purchases incurred in 1999
associated with all active projects, including those that were in process at
March 31, 1999.
NOTE 2 - HEALTHCARE REFORM LEGISLATION, REGULATIONS AND MARKET CONDITIONS
- -------------------------------------------------------------------------
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
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.
<PAGE>
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.
Oxygen Reimbursement
Medicare reimbursement for certain oxygen therapy services and products was cut
25% for services provided on or after January 1, 1998 and an additional 5% cut
took effect on January 1, 1999. Future increases have been tied to the
Consumer Price Index and will not resume until 2003. Revenues and pre-tax
income for the years ended March 31, 1999 and 1998 were approximately $1
million and $250,000, respectively, lower than they would have been had this
reimbursement reduction not taken place.
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 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 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. 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.
The Company believes that IPS is causing a contraction of Medicare home health
operations nationwide and is, despite Congressional intentions and HCFA
assurances to the contrary, a reduction of the Medicare home care benefit.
Visits performed by the Company for Medicare beneficiaries declined from
523,000 in 1998 to 350,000 in 1999 for a reduction of approximately 33%.
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
<PAGE>
further reduce costs (including staff reductions) and appropriately control
utilization for operation in the IPS environment. Since April 1, 1998, the
Company has experienced a decline in census, volumes, and length of stay
commensurate with the expectations outlined above. As a result, the Company
experienced a decline in revenues and contribution from this portion of its
operations (which incurred costs of approximately $2.6 million in excess of the
new Medicare reimbursement limits during fiscal 1999).
In July 1998, the Company executed a restructuring plan including work force
reduction, branch closings, and changes in compensation programs designed to
lower its operating costs and recorded a related charge of $550,000 before
taxes for severance, branch closings and other non-recurring expenses. As a
part of this restructuring program, 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 will be in
effect for the Company's fiscal year ending March 31, 2000 that are
approximately 9% higher than the limits in place during fiscal 1999. The
Company's operating costs exceeded limits by approximately 7% in the fiscal
year ended March 31, 1999. For the year ended March 31, 1999 revenues subject
to IPS were $28.7 million or 29.5% of total revenues compared to $34.0 million
and 35.7% in the year ended March 31, 1998.
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.
<PAGE>
NOTE 3 - 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
performed management services pursuant to management agreements scheduled to
expire in February and June 2000. On September 30, 1998 Columbia/HCA 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.
Accordingly, revenues and segment contribution both declined by close to 60% in
1999 from 1998 due to termination of the contract.
In October 1998, the Company entered into litigation with Columbia/HCA arising
from the management agreements between the parties. In December, 1998 the
parties reached an agreement under which Columbia/HCA has paid 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 offsets the estimated costs of providing the wind-down
services. The balance of $1,350,000 ($793,000 or $.25 per share after tax) was
recognized as a non-recurring litigation settlement gain in the third quarter.
As of March 31, 1999 $375,000 remained in an escrow account and was
subsequently collected by June 1999.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses at March 31, 1999 and 1998 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Trade payables $ 3,515,058 $ 5,769,528
Wages and employee benefits 3,576,379 5,106,929
Accrued taxes 1,586,454 845,694
Other 870,757 416,950
----------- -----------
$ 9,548,648 $12,139,101
=========== ===========
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment, including equipment under capital leases, consist of
the following:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Buildings and improvements $ 1,499,992 $ 1,407,526
Leasehold improvements 3,661,101 3,025,895
Medical equipment 6,860,882 6,841,810
Office and other equipmen 6,208,628 6,025,795
Transportation equipment 1,404,411 1,636,628
-------------- --------------
19,635,014 18,937,654
Less accumulated depreciation (12,181,810) (11,185,551)
-------------- --------------
$ 7,453,204 $ 7,752,103
============== ==============
</TABLE>
<PAGE>
Depreciation expense was approximately $2.2 million, $1.8 million and $1.8
million for the fiscal years ended March 31, 1999, 1998, and 1997,
respectively.
NOTE 6 - REVOLVING CREDIT FACILITY
- ----------------------------------
The Company has $18 million in credit facilities, comprised of $15 million with
the Healthcare Financial Services Division of Heller Financial, Inc.
(approximately $12.5 million and $11.0 million outstanding at March 31, 1999
and 1998 respectively) and a $3 million demand note 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 1/2 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 March 31, 1999, the Company had total cash and unused borrowings of
approximately $2.5 million. The Heller facility remains in effect until
October 13, 2000 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. As of March 31, 1999, the
Company was in default of certain financial covenants of the Heller facility,
however, Heller has waived these defaults.
The Company has a commitment from Bank One for a new $20 million credit
facility (to replace the existing facilities) which is expected to be in place
prior to August 31, 1999. 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.
<PAGE>
NOTE 7 - TERM DEBT
- ------------------
Term debt consists of the following:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
The Company has various promissory notes and
capital leases with interest rates ranging 8%
to 10.375% due in varying monthly amounts
ranging from $2,000 to $5,000, related to and
collaterized by certain real property and
equipment expiring at various dates through 2002. $ 697,359 $ 427,369
-------------- --------------
Less current portion (122,749) (230,185)
-------------- --------------
Non-current obligations $ 574,610 $ 197,184
============== ==============
</TABLE>
As of March 31, 1999, maturities of term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 122,749
2001 230,343
2002 344,267
--------------
Total maturities $ 697,359
==============
</TABLE>
NOTE 8 - INCOME TAXES
- ---------------------
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the Company's book
and tax bases of assets and liabilities and tax carryforwards using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The principal tax carryforwards and temporary differences were as follows:
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets
-------------------------------------
Nondeductible reserves and allowances $ 669,000 $ 879,000
Intangibles 2,455,000 -
Net operating loss carryforwards 1,198,000 232,000
Accelerated depreciation 792,000 432,000
AMT Credit 58,000 41,000
Other 9,000 -
-------------- --------------
5,181,000 1,584,000
Valuation allowance (451,000) (116,000)
-------------- --------------
$ 4,730,000 $ 1,468,000
============== ==============
Deferred tax liabilities
-------------------------------------
Accounts receivable $ 1,173,000 $ 605,000
Other 93,000 173,000
-------------- --------------
$ 1,266,000 $ 778,000
============== ==============
Net deferred tax assets $ 3,464,000 $ 690,000
============== ==============
</TABLE>
Provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal - Current $ 41,000 $ 267,000 $ 200,000
State and local - Current 345,000 150,000 148,000
Deferred (2,573,000) 574,000 (192,000)
------------ ------------ ------------
$(2,187,000) $ 991,000 $ 156,000
============ ============ ============
</TABLE>
A reconciliation of the statutory to the effective rate of the Company is as
follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax provision (benefit) using statutory rate $(2,731,000) $ 817,000 $ 651,000
Goodwill 361,000 79,000 75,000
Valuation Allowance 335,000 116,000 (1,156,000)
State and local taxes, net of federal benefit (234,000) 186,000 155,000
Other, net 82,000 207,000 431,000
------------ ------------ ------------
$(2,187,000) $ 991,000 $ 156,000
============ ============ ============
</TABLE>
The Company has provided a valuation allowance against certain net deferred tax
assets based upon management's estimation of realizability of those assets
through future taxable income. This valuation was based in large part on the
<PAGE>
Company's history of generating operating income or losses in individual tax
locales and expectations for the future. The Company's ability to generate the
expected amounts of taxable income from future operations to realize its
recorded net 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 net
deferred tax assets as of March 31, 1999.
As of March 31, 1999, the Company had a Federal net operating loss carryforward
of approximately $2.2 million expiring in 2014.
NOTE 9 - Shareholders Equity
- ----------------------------
Employee Stock Option Plans
- ---------------------------
1. The Company has a Nonqualified Stock Option Plan which provides for the
granting of options to key employees, officers, and directors, to purchase up
to 220,000 shares of the Company's common stock. The Board of Directors
determined the amount and terms of the options which cannot exceed ten years.
2. The Company has a Supplemental Nonqualified Stock Option Plan which
provides options to purchase up to 40,000 shares of the Company's common stock
to key employees and non-employee consultants. The Board of Directors
determined the amount and terms of the options, which cannot exceed ten years.
The period of time for granting options under this plan has expired.
3. The Company has a 1991 Long-term Incentive Nonqualified Stock Option Plan
which provides options to purchase of up to 500,000 shares of the Company's
common stock to key employees, officers, and directors. The Board of Directors
will determine the amount and terms of the options, which cannot exceed ten
years.
4. The Company has a 1993 Stock Option Plan for Non-employee Directors which
provides options to purchase up to 120,000 shares of the Company's common stock
to directors who are not employees. Each newly elected director or any
director who does not possess options to purchase 10,000 shares of the
Company's common stock will automatically be granted options to purchase 10,000
shares of common stock at an exercise price based on the market price as of
the date of grant.
Changes in qualified options, non-qualified options, and supplemental
non-qualified options and warrants outstanding are summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
Warrants Options
------------------- ------------------
Wtd. Avg Wtd. Avg
Shares Ex. Price Shares Ex. Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
March 31, 1996 286,600 $12.15 523,300 $ 7.82
Granted - 41,500 $ 6.30
Exercised - -
Terminated 20,000 $13.75 26,000 $ 4.34
------- -------
March 31, 1997 266,600 $12.03 538,800 $ 7.87
Granted - 46,500 $ 8.11
Exercised - 1,000 $ 7.81
Terminated - 151,300 $ 8.57
------- -------
March 31, 1998 266,600 $12.03 433,000 $ 7.65
Granted - 271,800 $ 2.37
Exercised - -
Terminated - 96,800 $ 6.69
------- -------
March 31, 1999 266,600 $12.03 608,000 $ 2.57
======= =======
</TABLE>
At March 31, 1999 and 1998, 266,600 warrants were exercisable. The following
table details exercisable options and related information:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Excercisable at end of year 136,850 350,000
Weighted Average Exercise Price $2.83 $7.80
Weighted Average of Fair Value
of options Granted during the year $0.82 $5.01
</TABLE>
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plans. In 1995, Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" (SFAS 123) was
issued and, if fully adopted, changes the method of recognition of costs on
plans similar to the Company's. The Company adopted the disclosure-only
provisions of SFAS 123. Accordingly, no compensation cost has been recognized
for the Company's stock option plans. Had compensation cost for the
stock option plans been determined based upon the fair value at the grant date
for the awards in 1999, 1998 and 1997 consistent with the provisions of SFAS
123, the effect on net income and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Income: As Reported $(6,227,667) $ 1,411,811 $ 1,759,370
Pro Forma (6,394,105) 1,274,061 1,582,801
Basic EPS: As Reported $ (2.00) $ 0.45 $ 0.56
Pro Forma (2.05) 0.41 0.51
Diluted EPS: As Reported $ (2.00) $ 0.45 $ 0.56
Pro Forma (2.05) 0.40 0.50
</TABLE>
<PAGE>
Because the SFAS 123 method of accounting has not been applied to options award
prior to April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------- --------------------------
Outstanding Wtd. Avg. Exercisable
Range of As of Remaining Wt. Avg. As of Wt. Avg.
Ex. Price March 31, 1999 Contractual Life Ex. Price March 31, 1999 Ex. Price
- -------------- -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$1.95 19,500 0.9 $ 1.95 19,500 $ 1.95
$2.00 - 3.00 581,400 5.9 $ 2.47 111,500 $ 2.42
Over $3.00 7,100 2.9 $12.59 5,850 $13.62
-------------- --------------
$1.95 - 18.15 608,000 5.6 $ 2.57 136,850 $ 2.83
============== ==============
</TABLE>
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for awards in 1999 and 1998 respectively: risk-free interest
rates of 4.8% and 5.8%, expected volatility of approximately 106% and 51%,
expected lives of 6.96 and 7.5 years and no expected dividend yields.
On December 14, 1998, the Company modified the terms of options for
approximately 320,900 shares of stock and terminated and reissued options for
approximately 54,000 shares reducing the exercise price to $2.63 per share from
prices ranging from $5 to 16 per share. The shares now vest 25% at the end of
each six-month period following the modification. No compensation expense was
required to be recorded in the accompanying financial statements as a result
of this modification.
Shareholders Rights Plan
On February 1, 1999 the Company implemented a shareholder protection rights
plan. One right was distributed as a dividend on each share of common stock of
the Company held of record as of the close of business on February 16, 1999.
The rights will be exercisable only if a person or group acquires beneficial
ownership of 20% or more of the Company's common stock or announces a tender of
exchange offer upon consummation of which, such person or group would
beneficially own 20% or more of the common stock of the Company. If the rights
are triggered, then each right not owned by the acquiring person or group
entitles its holder to purchase shares of Company common stock at the right's
current exercise price, having a value of twice the right's exercise price.
The Company may redeem the rights at any time until the close of business on
the tenth business day following and announcement by the Company that an
acquiring person or group has become the beneficial owner of 20% or more of the
Company's common stock.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
(a) Operating Leases
-----------------
The Company leases certain real estate, office space, vehicles and equipment
under noncancellable operating leases expiring at various dates through 2008.
Rent expense amounted to approximately $5.0, $4.5, and $3.5 million for 1999,
1998, and 1997, respectively. At March 31, 1999 the minimum rental payments
under these leases are as follows:
<TABLE>
<S> <C>
2000 $3,797,482
2001 3,268,454
2002 2,177,940
2003 1,565,711
2004 1,026,861
</TABLE>
(b) Employment Contracts
--------------------
The Company has an employment contract with an officer. In connection with
this contract, the Company is contractually obligated to pay an annual base
salary of $190,000 for one year with automatic one year renewals. In addition,
the agreement contains contingent obligations associated with performance
bonuses and severance.
(c) Medical Malpractice Claims
--------------------------
The Company has insurance coverage with respect to medical malpractice
risks. The malpractice insurance coverage provides coverage up to $1,000,000
per occurrence, and has no deductible for which the Company would be
responsible.
It is the Company's policy to record losses from asserted and unasserted claims
identified by the Company and unreported claims based on estimates that
incorporate the Company's past experience, as well as other considerations
including the nature of each claim or incident and relevant trend factors.
Based on these factors and the Company's insurance coverage, no accrual for
potential losses attributable to asserted and unasserted claims has been
recorded in the accompanying financial statements.
(d) Legal Proceedings
-----------------
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of its business, including claims for damages
for personal injuries. In the opinion of management, the ultimate resolution
of any of these pending claims and legal proceedings will not have a material
effect on the Company's financial position or results of operations.
On January 26, 1994 Franklin Capital Associates, Aetna Casualty and Surety and
Aetna Life and Casualty, shareholders, who at one time held approximately
320,000 shares of the Company's common stock (approximately 13% of shares
outstanding) filed suit in Chancery Court of Williamson County, Tennessee
claiming unspecified damages not to exceed three million dollars in connection
with registration rights they received in the Company's acquisition of National
Health Industries in February 1991. The suit alleges the Company failed to use
its best efforts to register the shares held by the plaintiffs as required by
the merger agreement. The Company believes it has meritorious defenses to the
claims and does not expect that the ultimate outcome of the suit will have a
material impact on the Company's results of operations, liquidity or financial
position. The Company plans to vigorously defend its position in this case. No
amounts have been recorded in the accompanying financial statements related to
this suit.
<PAGE>
In January 1997, Aetna Life & Casualty withdrew its claim against the Company
without prejudice.
NOTE 11 - ACQUISITIONS
- ----------------------
In the fourth quarter of fiscal 1998 the Company completed four separate
acquisitions of home and community-based health care businesses in transactions
accounted for as purchases. The results of operations for these business have
been included in the accompanying financial statements from the date of each
acquisition. The aggregate purchase was approximately $10 million of which
approximately $4.4 million was paid in cash with the balance assumed in
liabilities. The transactions resulted in approximately $6 million of cost in
excess of net assets acquired (goodwill) most of which was written off in June
1998 (see Note 1). The balance of approximately $150,000 is being amortized on
a straight line basis over its estimated useful life (twenty years) (see also
Note 1). The impact of the above acquisitions was not significant for any of
the periods presented and, accordingly, proforma amounts are not presented
illustrating the effects of such acquisitions.
NOTE 12 - 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 following table sets forth the
selected results of operations by business segment:
<PAGE>
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
- ----------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net Revenues
- -----------------------------------
Adult Day Health Services $ 38,379 $ 30,490 $ 25,185
Visiting Nurses 35,666 39,950 29,438
Product Operations 21,517 20,926 18,827
Contract Management Services 1,600 3,817 3,323
--------- --------- ---------
$ 97,162 $ 95,183 $ 76,773
--------- --------- ---------
Earnings before interest, taxes,
depreciation and amortization
before unusual items
- -----------------------------------
Adult Day Health Services $ 5,403 $ 3,166 $ 3,564
Visiting Nurses 1,984 4,133 3,187
Product Operations 5,706 5,720 5,039
Contract Management Services 1,301 3,078 2,499
--------- --------- ---------
$ 14,393 $ 16,097 $ 14,289
Corporate/Unallocated 10,633 10,118 9,363
--------- --------- ---------
$ 3,760 $ 5,979 $ 4,926
--------- --------- ---------
Unusual Items
- -----------------------------------
Adult Day Health Services $ 113 - -
Visiting Nurses 6,658 - -
Product Operations 2,095 - -
Contract Management Services (1,350) - -
--------- --------- ---------
$ 7,516 - -
Corporate/Unallocated 300 - -
--------- --------- ---------
$ 7,816 - -
--------- --------- ---------
Identifiable Assets
- -----------------------------------
Adult Day Health Services $ 11,760 $ 12,225 $ 9,420
Visiting Nurses 12,756 17,890 9,259
Product Operations 13,223 14,663 13,755
Contract Management Services 375 397 724
--------- --------- ---------
$ 38,114 $ 45,176 $ 33,158
Corporate/Unallocated 4,648 4,357 5,587
--------- --------- ---------
$ 42,762 $ 49,533 $ 38,745
--------- --------- ---------
Capital Expenditures
- -----------------------------------
Adult Day Health Services $ 873 $ 1,693 $ 795
Visiting Nurses 162 70 117
Product Operations 1,102 1,636 1,092
Contract Management Services - - -
--------- --------- ---------
$ 2,137 $ 3,399 $ 2,004
Corporate/Unallocated 647 619 617
--------- --------- ---------
$ 2,784 $ 4,018 $ 2,621
--------- --------- ---------
Depreciation and Amortization
- -----------------------------------
Adult Day Health Services $ 549 $ 860 $ 784
Visiting Nurses 135 134 72
Product Operations 938 895 906
Contract Management Services - - -
--------- --------- ---------
$ 1,622 $ 1,889 $ 1,762
Corporate/Unallocated 793 500 477
--------- --------- ---------
$ 2,415 $ 2,389 $ 2,239
--------- --------- ---------
</TABLE>
<PAGE>
NOTE 13-LOSS ON DISPOSITION OF CERTAIN OPERATIONS
- -------------------------------------------------
In the fourth quarter, the Company completed the sale of its Richmond, VA
nursing operations to Olsten Corp, a national home health provider, and in a
separate action closed its Boston, MA home medical equipment operations. These
activities resulted in a $1.6 million charge shown in the accompanying
statements of operations. The Richmond sale generated cash proceeds of
approximately $850,000 and a pre-tax gain of approximately $450,000. The
closure of the Boston operations generated a pre-tax loss of approximately
$2,148,000 consisting primarily of write-downs of goodwill, fixed assets and
accounts receivable based on management's estimate of net realizable value in
post-closure liquidation. In the aggregate, the affected operations generated
revenues of $4.1 million and contributed pre-tax losses of $390,000 in the year
ended March 31, 1999 and $4.7 million in revenues and $254,000 of pre-tax
income in the year ended March 31, 1998.
NOTE 14-RESTRUCTURING CHARGE
- ----------------------------
In July 1998 the Company executed a restructuring plan including work force
reduction, branch closings, and changes in compensation programs. 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 March 31, 1999, the Company has a
restructuring reserve balance of approximately $12,000 which is primarily
comprised of amounts related to branch closings.
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
Summarized quarterly financial data for years ended March 31, 1999 and 1998 are
as follows (in thousands except per share data):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues $23,666 $24,524 $24,821 $24,150 $21,521 $22,834 $23,436 $27,392
Gross Profit 3,336 4,483 4,743 4,169 4,443 4,882 4,744 4,663
Net Income (Loss) (5,748) (156) 1,063 (1,386) 293 415 410 294
Per Share
Basic ($1.84) ($0.05) $0.34 ($0.44) $0.09 $0.13 $0.13 $0.09
Diluted ($1.84) ($0.05) $0.34 ($0.44) $0.09 $0.13 $0.13 $0.09
</TABLE>
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Stockholders of Caretenders Health Corp.:
We have audited the accompanying consolidated balance sheets of Caretenders
Health Corp. (a Delaware corporation) and subsidiaries as of March 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended March
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caretenders Health Corp. and
subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
June 25, 1999
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ------------------------ --- -----------------------------------------------------------
<S> <C> <C>
William B. Yarmuth (1) 47 Chairman of the Board President and Chief Executive Officer
C. Steven Guenthner (2) 38 Senior Vice President and Chief Financial Officer
Mary A. Yarmuth (3) 53 Senior Vice President - Service Development
Ric Pritchard (4) 44 Senior Vice President -- Operations
Todd Lyles (5) 37 Senior Vice President - Planning and Development
Steven B. Bing (6) 52 Director
Patrick B. McGinnis (7) 52 Director
Donald G. McClinton (8) 66 Director
Tyree G. Wilburn (9) 47 Director
Jonathan Goldberg (10) 48 Director
Wayne T. Smith (11) 53 Director
</TABLE>
Executive officers of the Company are elected by the Board of Directors for one
year and serve at the pleasure of the Board of Directors with the exception of
William B. Yarmuth who has an employment agreement with the Company. See Item
11 -- William B. Yarmuth Employment Agreement. Mary A. Yarmuth is married to
William B. Yarmuth. There are no other family relationships between any
director or executive officer.
Each Director is elected to hold office until the next annual meeting of
stockholders and until a successor is elected and qualified.
(1) William B. Yarmuth has been a director of the Company since 1991, when the
Company acquired National, where Mr. Yarmuth was Chairman, President and Chief
Executive Officer. After the acquisition, Mr. Yarmuth became the President and
Chief Operating Officer of the Company. Mr. Yarmuth became Chairman and CEO in
1992. He was Chairman of the Board, President and Chief Executive Officer of
National from 1981 to 1991.
(2) C. Steven Guenthner has been Senior Vice President and Chief Financial
Officer of the Company since 1992. From 1983 through 1992 Mr. Guenthner was
employed as a C.P.A. with Arthur Andersen LLP. Prior to joining the Company he
served as a Senior Manager in the firm's Accounting and Audit division
specializing in mergers and acquisitions, public companies and the healthcare
industry.
<PAGE>
(3) Mary A. Yarmuth has served as Senior Vice President of the Company since
1991, currently as Senior Vice President of Service Development. From 1985 to
1991 Ms. Yarmuth served as President of the Company's Nursing Division. Ms.
Yarmuth joined National in 1981.
(4) Ric Pritchard has served as Senior Vice President Operations of the
Company since February of this year. Ric has been in the field of Home
Healthcare since 1981 in the areas of Home Infusion, HME, Managed Care and Home
health Nursing. His functional responsibilities have encompassed sales, sales
management, operations, operations management, managed care contracting and
management and senior management with American Hospital Supply Corp./ Baxter,
Healthdyne/ HNS/ NMC Homecare and Olsten Health Services, Inc.
(5) P. Todd Lyles joined the Company as Senior Vice President Planning and
Development in October 1997. Prior to joining the Company Mr. Lyles was Vice
President Development for the Kentucky Division of Columbia/HCA, a position he
had held since 1993. Mr. Lyles experience also includes 8 years with Humana
Inc. in various financial and hospital management positions.
(6) Steven B. Bing was elected a Director in January 1992. Mr. Bing is an
employee of R. Gene Smith, Inc., a private investment company located in
Louisville, Kentucky. From 1989 to March 1992, Mr. Bing was President of ICH
Corporation, an insurance holding company. From 1984 to 1989, he served as
Senior Vice President of ICH Corporation. He is also a director of the
University of Louisville, First Alliance Corporation, and various closely-held
business entities.
(7) Patrick B. McGinnis was elected a director in October 1994. Mr. McGinnis
is the co-founder of Healthcare Recoveries, Inc. and serves as the company's
chairman and CEO. Healthcare Recoveries, Inc. is a provider of subrogation and
other claims recovery services to the healthcare industry. From 1979 to 1988,
Mr. McGinnis was Vice President-Finance and Planning for Humana, Inc.
(8) Donald G. McClinton was elected a director in October 1994. From 1986 to
1994, Mr. McClinton was co-chairman of Interlock Industries, Inc., a privately
held company engaged in metal fabrication, corrugated container manufacturing,
aluminum processing and transportation. Presently, Mr. Clinton is President
and part owner of Skylight Thoroughbred Training Center, Inc., a thoroughbred
course training center. He is also a director of Jewish Hospital Systems,
Inc., and Mid-America Bancorp.
(9) Tyree G. Wilburn was elected a director in January 1996. Mr. Wilburn is a
private investor. From 1992 to 1996, Mr. Wilburn was Chief Development Officer
of Community Health Systems, Inc. and, most recently, Executive Vice President
and Chief Financial and Development Officer. From 1974 to 1992 Mr. Wilburn was
with Humana Inc. where he held senior and executive positions in mergers and
acquisitions, finance, planning, hospital operations, audit and investor
relations. He is also a director of several private companies.
(10) Jonathan Goldberg was elected a director in February 1997. Mr. Goldberg
is the managing partner of the law firm of Goldberg and Simpson and has served
in that capacity for the last five years.
<PAGE>
(11) Wayne T. Smith was elected a director in March 1997. Mr. Smith is
President and Chief Executive Officer of Community Health Systems, Inc. Mr.
Smith was President and Chief Operating Officer of Humana, Inc. from 1993 to
1996 and has served with Humana from 1973 to 1993 in various capacities,
including numerous vice president and divisional president positions.
COMPLIANCE WITH SECTION 16 (a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16 (a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of stock ownership and
reports of changes in stock ownership and to provide the company with copies of
all such forms they file. Based solely on its review of such copies or written
representations from reporting persons, the Company believes that all reports
were filed on a timely basis, except that Form 5 reports were not timely filed
with respect to phantom stock units held in the non-employee directors deferred
compensation program.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid by the
Company for services rendered in all capacities during the last three fiscal
periods to the Chief Executive Officer and the most highly compensated
executive officers during fiscal year 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Compensation
---------------
Securities
Underlying
Options
Name and Principal Position Year Salary Bonus (No. of Shares)
- --------------------------- ----- --------- --------- ---------------
<S> <C> <C> <C> <C>
William B. Yarmuth 1999 $190,000 $ - 100,000
Chairman of the Board, 1998 190,000 75,596 -
President and Chief 1997 190,000 - -
Executive Officer
Mary A. Yarmuth 1999 130,050 - 20,000
Senior Vice President 1998 129,854 36,904 -
Service Development 1997 126,058 - -
C. Steven Guenthner 1999 130,050 - 20,000
Senior Vice President, 1998 129,854 36,904 -
Secretary/Treasurer and 1997 126,058 - -
Chief Financial Officer
T. Ric Pritchard 1999 125,000(1) - 15,000
Senior Vice President 1998 9,615 2,733 20,000
Operations 1997 N/A N/A N/A
Patrick T. Lyles 1999 120,000(2) - 15,000
Senior Vice President 1998 43,386 12,330 20,000
Planning and Development 1997 N/A N/A N/A
</TABLE>
(1) Mr. Pritchard was employed by the Company on February 16, 1998
(2) Mr. Lyles was employed by the Company on October 6, 1997
Option Grants in Fiscal 1999
Mr. Yarmuth was awarded options to purchase 100,000 of the Company's common
stock at $2.19 per share. Mr. Guenthner and Mrs. Yarmuth were awarded options
to purchase 20,000 shares of the Company's common stock at $2.19 per share. Mr.
Pritchard and Mr. Lyles were awarded options to purchase 15,000 shares of the
Company's common stock at $2.19 per share. No other stock options or stock
appreciation rights were awarded to the named executive officers during the
1999 fiscal year.
<PAGE>
Compensation of Directors
Directors who are not also employees of the Company are entitled to
compensation at a rate of $1,250 for each Board of Directors meeting attended
and $250 for each committee meeting attended that is scheduled independently.
In addition, non-employee directors are eligible to receive stock options under
the Caretenders Health Corp. 1993 Stock Option Plan for Non-Employee Directors
(the "Directors' Plan") adopted by the Board on February 17, 1993, and
subsequently approved by stockholders. Pursuant to the terms of the Directors'
Plan, Mr. Wilburn was granted options to purchase 2,000 shares of the Company's
Common Stock at $2.63 per share. The Directors' options vest 25%, the day
following six months after the date of grant, and 25% on each of the first,
second, and third anniversary dates of the grant.
William Yarmuth Employment Agreement
On January 1, 1996, the Company entered into a new employment agreement with
William B. Yarmuth, its Chairman of the Board, President and Chief Executive
Officer. The initial term of the agreement was three years with subsequent
automatic one-year renewals, the first of which is now in effect. This
agreement replaced Mr. Yarmuth's previous agreement which was not scheduled to
expire until 1998. Under the terms of the current agreement, Mr. Yarmuth earns
an annual base salary of $190,000 and is eligible for a performance based cash
incentive of 35% of annual base salary. The agreement includes a covenant not
to compete for a period of two years and potential termination payments of two
times annual salary.
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
Set forth below is information with respect to unexercised stock options held
by the executive officers named in the Summary Compensation Table at March 31,
1999. None of the named executive officers exercised any stock options during
the 1999 fiscal year.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired Options at Fiscal Yearend at Fiscal Yearend (1)
On Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William B. Yarmuth - - 25,000 225,000 - -
Mary A. Yarmuth - - 24,500 54,000 $975 -
C. Steven Guenthner - - 5,000 50,000 - -
T. Ric Pritchard - - 3,750 31,250 - -
Patrick T. Lyles - - 3,750 31,250 - -
</TABLE>
(1) These amounts represent the market value less the exercise price. The
market value of the common stock was $2.00 based on the closing price per
share at March 31, 1999, on the NASDAQ SmallCap System.
Ten-Year Option Repricings
Set forth below is information with respect to stock options held by the
executive officers named in the Summary Compensation Table at March 31, 1999
which were re-priced during the fiscal year then ended.
<TABLE>
<CAPTION>
Securities Length of
underlying Market Exercise original option
number price of price New term remaining
of options at time of at time exercise at date of
Name Date re-priced re-pricing re-pricing price re-pricing (yrs)
- ------------------ -------- ---------- ---------- ---------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
William B. Yarmuth 12/14/98 100,000 2.63 8.75 2.63 2.3
12/14/98 17,000 2.63 6.25 2.63 6.9
12/14/98 8,000 2.63 6.25 2.63 6.9
12/14/98 25,000 2.63 5.88 2.63 7.1
Mary A. Yarmuth 12/14/98 12,000 2.63 9.38 2.63 3.1
12/14/98 12,000 2.63 9.38 2.63 4.2
12/14/98 15,000 2.63 6.25 2.63 6.9
C. Steven Guenthner 12/14/98 20,000 2.63 9.69 2.63 3.8
12/14/98 15,000 2.63 6.25 2.63 6.9
T. Ric Pritchard 12/14/98 20,000 2.63 7.75 2.63 9.3
Patrick T. Lyles 12/14/98 20,000 2.63 8.50 2.63 8.9
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
Based on information filed with the Securities and Exchange Commission and the
Company's stock records, the following table sets forth the beneficial
ownership of the Common Stock as of March 31, 1999, by (I) beneficial owners of
more than five percent of the Common Stock, (ii) each director and nominee for
director, (iii) current named executive officers and (iv) all directors and
officers of the Company as a group.
<TABLE>
<CAPTION>
Shares of Capital
Stock Beneficially Owned (1)(2)
---------------------------------------------
Name and Address Amount and Nature Percentage
Directors and Executive Officers of Beneficial Ownership of Class
- ------------------------------------- ------------------------- ----------------
<S> <C> <C>
William B. Yarmuth 253,383 (3) 7.97%
100 Mallard Creek Road, Suite 400
Louisville, KY 40207
Mary A. Yarmuth 253,383 (4) 7.97%
C. Steven Guenthner 20,841 (5) *
Steven B. Bing 12,340 (6) *
Patrick B. McGinnis 17,000 (7) *
Donald G. McClinton 21,000 (7) *
Tyree Wilburn 20,000 (8) *
Jonathan Goldberg 11,500 (9) *
Wayne Smith 86,400 (9) 2.75%
T. Ric Pritchard 3,750 (9) *
Patrick T. Lyles 9,814 (9) *
Directors and Officers
as a Group (11 Persons) 456,028 (11) 14.03%
Additional Five Percent Beneficial Owners
- -----------------------------------------
HEALTHSOUTH Rehabilitation Corporation 1,015,101 (10) 32.43%
Two Perimeter Park South
Birmingham, AL 35243
Heartland Advisors, Inc. 445,300 14.2%
790 North Milwaukee Street
Milwaukee, WI 53202
Yarmuth Family Limited Partnership 157,723(12) 5.04%
2605 Maitland Center Parkway, Suite C
Maitland, FL 32751
</TABLE>
* Represents less than 1% of the class.
<PAGE>
(1) Based upon information furnished to the Company by the named persons, and
information contained in filings with the Securities and Exchange Commission
(the "Commission"). Under the rules of the Commission, a person is deemed to
beneficially own shares over which the person has or shares voting or
investment power or has the right to acquire beneficial ownership within 60
days. Unless otherwise indicated, the named person has the sole voting and
investment power with respect to the number of shares of Common Stock set forth
opposite such person's name.
(2) Assumes inclusion of the shares of common stock issuable upon exercise of
outstanding redeemable warrants; assumes conversion of series A Convertible
Preferred Stock into Common Stock.
(3) Includes 8,886 shares as to which Mr. Yarmuth shares voting and investment
powers as a family trust and an option for 25,000 shares vested and
exercisable, and 24,500 exercisable options owned by Mrs. Yarmuth in addition
to 12,927 shares owned directly by Mrs. Yarmuth.
(3) Includes the same ownership components as stated for Mr. Yarmuth.
(5) Includes 5,000 shares subject to currently exercisable options.
(6) Includes 12,000 shares subject to currently exercisable options.
(7) Includes 11,000 shares subject to currently exercisable options.
(8) Includes 10,000 shares subject to currently exercisable options.
(9) Includes 7,500 shares subject to currently exercisable options.
(10) Includes currently exercisable warrants for the purchase of 200,000 shares
of Common Stock. In addition, HEALTHSOUTH owns warrants for an additional
66,600 Series A Convertible Preferred Shares.
(11) Includes currently exercisable options held by all directors and officers
as a group to purchase 121,000 shares of Common Stock.
(12) Robert N. Yarmuth is the general partner and is the brother of
William B. Yarmuth.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an agreement with HEALTHSOUTH under which HEALTHSOUTH purchases
certain durable medical equipment and prosthetic and orthotic appliances (to
fill HEALTHSOUTH's normal business requirements of such items) from the
Company. During the years ended March 31, 1999, 1998 and 1997 the Company
realized sales of less than $85,000 to HEALTHSOUTH at terms the Company
normally offers its customers.
<PAGE>
PART IV
Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K.
Page Number
(a)(1) Index to Consolidated Financial Statements -----------
Consolidated Statements of Operations for the three years
ended March 31, 1999, 1998, and 1997 32
Consolidated Balance Sheets - March 31, 1999 and 1998 33
Consolidated Statements of Stockholders' Equity for
the three years ended March 31, 1999, 1998, and 1997 34
Consolidated Statements of Cash Flows for the three years
ended March 31, 1999, 1998, and 1997 35
Notes to Consolidated Financial Statements 36-52
Report of Independent Public Accountants 53
(a)(2) Index to Financial Statement Schedule
Report of Independent Public Accountants 67
Schedule II - Valuation and Qualifying Accounts S-1
All other Schedules have been omitted because they are either not required, not
applicable or, the information has otherwise been supplied in the financial
statements or notes thereto.
<PAGE>
(a)(3) Exhibits (* denotes filed herein)
Exhibit
Number Description of Exhibit
------- ------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended
3.2 Amended and Restated By-laws
4.1 Medical Claims, Revolving Loan Agreement, Revolving Credit Note
and exhibits between the Company and Heller Financial dated
June 20, 1994
4.2 Other Debt Instruments -- copies of other debt instruments for
which the total debt is less than 10% of assets will be furnished
to the Commission upon request.
10.1 Form of Lender's Notes and Lenders' Warrants (Incorporated by
Reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 Reg. No. 33-8158 effective December 2, 1986)
10.2 Stockholders and Noteholders Agreement, dated February 5, 1991, by
and among the Company, Senior Kentucky, Inc., National Health
Industries, Inc., Franklin Capital Associates, L.P., Aetna Life
and Casualty Company, The Standard Fire Insurance Company and the
holders of National's common stock (Incorporated by reference to
Exhibit 2.3 to the Registrant's Report on Form 8-K, dated
February 5, 1991)
10.3 Nonqualified Stock Option Plan, as amended (Incorporated by
reference to the Registrant's Registration Statement on Form S-8
Reg. No. 33-20815)
10.4 Supplemental Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 19.4 to the Registrant's Report on Form 10-Q
for the Quarter Ended November 30, 1987 Commission File No. 15342)
10.5 Incentive Stock Option Plan, as amended (Incorporated by reference
to the Registrant's Registration Statement on Form S-8 Reg.
No. 33-20815)
10.6 Indemnity Agreement, effective as of October 15, 1987, between
Senior Service Corporation and Robert S. Shulman (Incorporated by
Reference to Exhibit 10.46 to the Registrant's Post-Effective
Amendment No. 3 to its Registration Statement on Form S-1 Reg.
No. 33-8158)
10.7 Amendment to the Senior Service Corporation 1987 Nonqualified
Stock Option Plan (Incorporated by reference to Exhibit 19.3 to
the Registrant's Report on Form 10-Q for the quarter ended
November 30, 1989)
10.9 Provider Agreement, dated May 24, 1989, between the Maryland State
Department of Health and Mental Hygiene and Towson Community Adult
Day Care (Incorporated by reference to Exhibit 10.70 to the
Registrant's Post-Effective Amendment No. 4 to its Registration
Statement on Form S-1 File No. 33-8158)
<PAGE>
10.22 1991 Long-Term Incentive Plan
10.23 Warrant Agreement, dated June 29, 1991, between the Company and
HEALTHSOUTH Rehabilitation Corporation (incorporated by reference
to Exhibit 10.88 to the Registrant's Form S-1 Reg. 33-46565 dated
April 23, 1993)
10.24 Employment Agreement, dated January 1. 1996, between the Company
and William B. Yarmuth
10.25 Asset Sale Agreements between the Company and Columbia/HCA
Healthcare Corporation
10.26 Management Services Agreement between the Company and Columbia/HCA
Healthcare Corporation
10.27 Asset Purchase Agreement between the Company and Home Care
Solutions, Inc.
10.28 Asset Purchase Agreement between the Company and Metro Home Care,
Inc.
10.29 Asset Purchase Agreement between the Company and Visiting Nurse
Association of Palm Beach County, Inc.
22* List of Subsidiaries of Caretenders Health Corp.
24.1* Consent of Arthur Andersen LLP
27* Financial Data Schedule
(b) Reports on Form 8-K
Form 8K was filed by the Company on October 15, 1998 and January 4, 1999
related to certain management contracts.
(c) Exhibits
Described in Item 14(a)(3) of this report
(d) Financial Statement Schedules
Described in Item 14(a)(2) of this report
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the under-signed, thereunto duly authorized.
CARETENDERS HEALTH CORP.
July 14, 1999
/s/ William B. Yarmuth
William B. Yarmuth
Chairman, President and Chief Executive Officer
/s/ C. Steven Guenthner
C. Steven Guenthner
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
/s/ William B. Yarmuth July 14, 1999
William B. Yarmuth Date
Director
/s/Patrick B. McGinnis July 14, 1999
Patrick B. McGinnis Date
Director
/s/Donald G. McClinton July 14, 1999
Donald G. McClinton Date
Director
/s/Steven B. Bing July 14, 1999
Steven B. Bing Date
Director
/s/Tyree Wilburn July 14, 1999
Tyree Wilburn Date
Director
/s/Jonathan Goldberg July 14, 1999
Jonathan Goldberg Date
Director
/s/Wayne T. Smith July 14, 1999
Wayne T. Smith Date
Director
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Stockholders of Caretenders Health Corp.:
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
Financial Statement Schedule is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
June 25, 1999
<PAGE>
CARETENDERS HEALTH CORP AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Col A Col. B Col. C Col. D Col. E
----- ------ ------ ------ ------
Additions
-------------------------
(1)
Balance at Charged Charged Balcance at
Beginning to Costs to Other (2) End of
Decsctiption Of Period & Expenses Accounts Deductions Period
- --------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Allowance for bad debts $3,691,337 $2,337,373 $ - $2,706,750 $3,321,960
========== ========== ========== ========== ==========
Year ended March 31, 1998:
Allowance for bad debts $3,153,145 $2,634,985 $ - $2,096,793 $3,691,337
========== ========== ========== ========== ==========
Year ended March 31, 1997:
Allowance for bad debts $2,884,743 $2,215,537 $ - $1,947,135 $3,153,145
========== ========== ========== ========== ==========
</TABLE>
(1) Charged to bad debt expense.
(2) Write-off of accounts.
<PAGE>
CARETENDERS HEALTH CORP
LIST OF SUBSIDIARIES
AS OF MARCH 31, 1999
EXHIBIT 22
Subsidiaries of Caretenders Health Corp
- ---------------------------------------
Adult Day Care of America, Inc. Adult Day Care of Louisville, Inc.
Adult Day Care of Maryland, Inc. HouseCalls, Inc.
National Health Industries, Inc. HHJC Holdings, Inc.
Pro-Care Home Health of Broward, Inc. SEI Publishing Corporation
Adult Day Clubs of America Joint Venture, Ltd.
Subsidiaries of National Health Industries, Inc.
- ------------------------------------------------
Freelife Medical Equipment, Inc. Caretenders Homecare, Inc.
Caretenders Infusion of Birmingham, Inc. Caretenders of Birmingham, Inc.
Caretenders of Boston, Inc. Caretenders of Cincinnati, Inc.
Caretenders of Columbus, Inc. Caretenders of Elizabethtown, Inc.
Caretenders of Indiana, Inc. Caretenders of Indianapolis, Inc.
Caretenders of Lincoln Trail, Inc. Caretenders of Louisville, Inc.
Caretenders of New Jersey, Inc. Caretenders of Richmond, Inc.
Caretenders of Northern Kentucky, Inc. Caretenders of the Bluegrass,Inc.
House Calls of America, Inc. Caretenders Infusion Corp.
Metro Home Care, Inc. Physician Affiliates, Inc.
Special Healthcare Services, Inc. Reliable Home Healthcare, Inc.
Caretenders of Cleveland, Inc. Caretenders of Evansville, Inc.
Caretenders of West Palm Beach, Inc. Caretenders of Charlotte, Inc.
Caretenders of Southwest Florida, Inc.
Caretenders of Fort Lauderdale, Inc.
National Orthopedic & Rehabilitation Services, Inc.
Caretenders Visiting Services of Indianapolis, Inc.
Caretenders Visiting Services of Southwest FL, Inc.
Caretenders Visiting Services of Southeast FL, Inc.
Caretenders Visiting Services of Richmond, Inc.
Caretenders Visiting Services of Cincinnati, Inc.
Caretenders Visiting Services of Columbus, Inc.
Subsidiary of HHJC Holdings, Inc.
- ---------------------------------
Home Health of Jefferson County, Inc.
Caretenders of Marshall County, Inc.
<PAGE>
Exhibit 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-33601 relating to the Company's Incentive
Stock Option Plan, Registration Statement File No. 33-81122 related to the 1987
Nonqualified Stock Option Plan, Registration Statement No. 33-881100 related to
the 1993 Non-Employee Directors Stock Option Plan, Registration Statement No.
33-81124 related to the 1991 Long-Term Incentive Plan, and Registration
Statement File No. 333-43631 related to the Non-Employee Directors Deferred
Compensation Plan.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
July 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,039
<SECURITIES> 0
<RECEIVABLES> 23,785
<ALLOWANCES> 3,322
<INVENTORY> 783
<CURRENT-ASSETS> 589
<PP&E> 19,635
<DEPRECIATION> 12,182
<TOTAL-ASSETS> 42,762
<CURRENT-LIABILITIES> 13,344
<BONDS> 0
<COMMON> 15,855
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,762
<SALES> 97,162
<TOTAL-REVENUES> 97,162
<CGS> 80,431
<TOTAL-COSTS> 103,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,562)
<INCOME-PRETAX> (8,032)
<INCOME-TAX> (2,187)
<INCOME-CONTINUING> (5,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 383
<NET-INCOME> (6,227)
<EPS-BASIC> (2.00)
<EPS-DILUTED> (2.00)
</TABLE>
