<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1994 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-9868
T(2) MEDICAL, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 59-2405366
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1121 Alderman Drive, Alpharetta, Georgia 30202
- - - ------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(404) 442-2160
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Registrant's Telephone Number, Including Area Code
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
----- -----
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of April 30, 1994 was 41,172,567 shares.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
T(2) MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
1994 1993
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,752,725 $ 16,258,297
Short-term investments 28,075,944 47,647,163
Receivables:
Patient billings (less allowance
for doubtful accounts of
$4,815,874 at March 31, 1994
and $5,525,840 at September 30,
1993 25,283,339 26,979,099
Other receivables:
Management fees 7,030,816 7,464,206
Lithotripsy 7,294,014 6,313,065
Other 4,784,523 6,955,650
Inventories 5,805,380 4,561,234
Refundable income taxes 4,275,130 ---
Prepaid expenses 2,230,391 986,329
------------ ------------
Total current assets 106,532,262 117,165,043
Property and equipment, net 23,527,595 24,248,211
Goodwill and other intangible
assets (net of accumulated
amortization of $15,573,884 at
March 31, 1994 and $13,104,727 at
September 30, 1993) 179,140,878 175,114,254
Other assets 13,934,636 12,419,546
------------ ------------
Total assets $323,135,371 $328,947,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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T(2) MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
1994 1993
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Short-term debt $ 7,708,000 $ 23,000,000
Current portion of long-term debt
and obligations under
capital leases 2,459,028 3,126,871
Accounts payable and accrued expenses 6,409,030 8,365,224
Income taxes payable --- 945,940
Deferred income taxes payable 1,653,700 1,080,085
Other current liability 273,000 273,000
------------ ------------
Total current liabilities 18,502,758 36,791,120
Long-term debt and obligations under
capital leases, exclusive of
current maturities 2,106,976 3,097,164
Deferred income taxes payable 678,935 328,266
Other long-term liability 1,296,752 1,433,252
Minority interests in subsidiaries 6,348,907 5,836,376
------------ ------------
Total liabilities and
minority interests 28,934,328 47,486,178
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
100,000,000 shares authorized; shares
issued and outstanding; 41,147,567 at
March 31, 1994 and 40,486,387 at
September 30, 1993 411,476 404,864
Additional paid-in capital 158,073,143 154,702,147
Retained earnings 135,716,424 126,353,865
------------ ------------
Total stockholders' equity 294,201,043 281,460,876
------------ ------------
Total liabilities and
stockholders' equity $323,135,371 $328,947,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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T(2) MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1994 1993
---- ----
<S> <C> <C>
Revenues:
Home infusion therapy $34,081,574 $47,070,196
IntraCare 9,861,226 11,335,585
Lithotripsy 12,219,773 6,987,282
Other 2,046,729 2,277,372
----------- -----------
Total revenues 58,209,302 67,670,435
----------- -----------
Costs and expenses:
Cost of revenues 37,499,145 35,245,559
Selling, general and administrative 9,240,756 7,273,603
Provision for doubtful accounts 2,580,934 7,066,797
Amortization of intangibles 1,279,922 1,068,731
----------- -----------
Total costs and expenses 50,600,757 50,654,690
----------- -----------
Income from operations 7,608,545 17,015,745
Other income (expense):
Interest expense (155,620) (352,795)
Interest income 617,520 817,902
Equity in earnings of unconsolidated
subsidiaries 169,565 212,417
Other 106,395 (290,638)
----------- -----------
Income before income taxes
and minority interest 8,346,405 17,402,631
Provision for income taxes 2,617,523 5,677,912
Minority interest in income
of subsidiaries 2,472,883 1,463,162
----------- -----------
Net income $ 3,255,999 $10,261,557
=========== ===========
Net income per common and
common equivalent share $ .08 $ .25
=========== ===========
Cash dividends paid per
share of common stock $ .025 $ .025
=========== ===========
Weighted average common and common
equivalent shares outstanding 41,187,280 40,664,544
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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T(2) MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------
1994 1993
---- ----
<S> <C> <C>
Revenues:
Home infusion therapy $73,010,728 $100,281,154
IntraCare 21,056,525 22,021,567
Lithotripsy 23,764,529 12,283,779
Other 4,041,087 4,856,806
----------- ------------
Total revenues 121,872,869 139,443,306
----------- ------------
Costs and expenses:
Cost of revenues 75,136,471 68,839,826
Selling, general and administrative 15,869,702 13,545,407
Provision for doubtful accounts 4,762,190 14,999,547
Amortization of intangibles 2,497,824 2,061,110
----------- ------------
Total costs and expenses 98,266,187 99,445,890
----------- ------------
Income from operations 23,606,682 39,997,416
Other income (expense):
Interest expense (301,087) (660,474)
Interest income 1,335,018 1,607,948
Equity in earnings of unconsolidated
subsidiaries 452,316 502,980
Other 174,516 52,033
----------- ------------
Income before income taxes
and minority interest 25,267,445 41,499,903
Provision for income taxes 8,867,073 14,105,935
Minority interest in income
of subsidiaries 4,998,584 3,022,638
----------- ------------
Net income $11,401,788 $ 24,371,330
=========== ============
Net income per common and
common equivalent share $ .28 $ .60
=========== ============
Cash dividends paid per
share of common stock $ .050 $ .050
=========== ============
Weighted average common and common
equivalent shares outstanding 40,955,308 40,582,233
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
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T2 MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-------------------------------
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................... $11,401,788 $24,371,330
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......... 5,930,883 4,747,464
Provision for doubtful accounts....... 4,762,190 14,999,547
Tax benefit of stock options.......... --- 510,051
Equity in earnings of unconsolidated
subsidiaries......................... (452,316) (502,980)
Distributions from unconsolidated
subsidiaries......................... 351,895 190,000
Loss on sale of assets................ 11,416 1,452,002
Change in assets and liabilities net
of effects from purchased businesses:
Receivables.......................... (966,752) (9,316,009)
Inventories.......................... (1,244,147) 301,786
Prepaid expenses and other assets.... (1,330,268) (2,587,316)
Accounts payable and accrued expenses (2,430,521) (3,211,404)
Income taxes payable................. (5,221,069) (13,581,653)
Deferred income taxes payable........ 924,284 1,861,225
Minority interests in subsidiaries... 512,531 (943,146)
----------- -----------
Cash provided by operating
activities....................... 12,249,914 18,290,897
----------- -----------
Cash flows related to investing activities:
Payments for businesses acquired
(less cash acquired)................... (6,564,692) (23,094,058)
Additions to property and equipment, net. (3,104,556) (2,773,209)
Proceeds from sale of property and
equipment.............................. 414,939 89,274
Investment in unconsolidated
subsidiaries........................... (1,325,000) ---
Short-term investments............. 19,571,219 543,441
----------- -----------
Cash provided by (used in)
investing activities 8,991,910 (25,234,552)
----------- -----------
Cash flows related to financing activities:
Proceeds from issuance of common stock... 3,378,364 849,754
Proceeds from issuance of short-term
notes and long-term debt............... --- 23,785,000
Payment of short-term notes and long-
term debt.............................. (17,086,530) (10,125,540)
Distributions of S Corporation earnings --- (5,849,199)
Cash dividends........................... (2,039,230) (1,898,094)
----------- -----------
Cash used in
financing activities........... (15,747,396) 6,761,921
----------- -----------
Increase (decrease) in cash and
cash equivalents............... 5,494,428 (181,734)
Cash and cash equivalents at
beginning of period............ 16,258,297 14,509,800
----------- -----------
Cash and cash equivalents at end
of period...................... $21,752,725 $14,328,066
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE> 7
<TABLE>
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 301,087 $ 660,474
Cash paid for income taxes 13,631,053 25,580,672
</TABLE>
On January 1, 1992, the Company acquired a 35% interest in Bay Area
Partners ("Bay Area"), a general partnership formed between the Company and Bay
Area Renal Stone Center, Ltd., for a purchase price of $13,025,655. Effective
October 1, 1992, the Company increased its ownership in Bay Area to 65% by
acquiring an additional 30% of Bay Area for a cash purchase price of
$9,215,784. The total purchase price of $22,241,439 was funded by the issuance
of 104,250 shares of common stock (valued at $5,719,155) and cash of
$16,522,284. Liabilities assumed in connection with the acquisition were
$177,015. Substantially all of the purchase price was allocated to goodwill.
The acquisition was accounted for as a purchase and was consolidated in the
Company's operations after October 1, 1992.
Effective October 1, 1992, the Company acquired 51% of the outstanding
common stock of Pediatric Partners, Inc. ("Pediatric") for a total purchase
price of $2,250,000. The purchase was funded by the conversion of previously
purchased convertible debentures into common stock which represents a 51%
ownership interest in Pediatric. Liabilities assumed in connection with the
acquisition were $191,702. Substantially all of the purchase price was
allocated to goodwill. The acquisition was accounted for as a purchase and was
consolidated in the Company's operations after October 1, 1992.
On December 31, 1993, the Company invested cash of $2,082,800 which
resulted in the Company acquiring a 63.5% interest in Southwest Lithotripter
Joint Venture ("Southwest"). Liabilities assumed in connection with the
acquisition were immaterial. Substantially all of the purchase price was
allocated to goodwill and is being amortized on a straight-line basis over 40
years. The acquisition was accounted for as a purchase and was included in the
Company's operations after December 31, 1993.
On December 31, 1993, the Company acquired 100% of the outstanding
common stock of Intracare of Atlanta, Inc. ("Atlanta") for a total cash
purchase price of $2,322,139. No liabilities were assumed in connection with
the acquisition. Substantially all of the purchase price was allocated to
goodwill and is being amortized on a straight-line basis over 40 years. The
acquisition was accounted for as a purchase and was included in the Company's
operations after December 31, 1993.
On February 1, 1994, the Company acquired 100% of the outstanding
common stock of Intracare of Atlanta III, Inc. ("Atlanta III") for a total cash
purchase price of $94,530. Liabilities assumed in connection with the
acquisition were
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immaterial. Substantially all of the purchase price was allocated to goodwill
and is being amortized on a straight-line basis over 40 years. The acquisition
was accounted for as a purchase and was included in the Company's operations
after February 1, 1994.
On February 1, 1994, the Company acquired 100% of the outstanding
common stock of Intracare of Atlanta V, Inc. ("Atlanta V") for a total cash
purchase price of $208,005. Liabilities assumed in connection with the
acquisition were immaterial. Substantially all of the purchase price was
allocated to goodwill and is being amortized on a straight-line basis over 40
years. The acquisition was accounted for as a purchase and was included in the
Company's operations after February 1, 1994.
On March 1, 1994, the Company acquired a 60% interest in Indiana Stone
Center, Inc. ("Indiana") for a cash purchase price of $2,000,000. Liabilities
assumed in connection with the acquisition were immaterial. Substantially all
of the purchase price was allocated to goodwill and is being amortized on a
straight-line basis over 40 years. The acquisition was accounted for as a
purchase and was included in the Company's operations after March 1, 1994.
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Notes to Condensed Consolidated
Financial Statements
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements contained in this
report are unaudited, but reflect all adjustments, which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position at the end of and results of operations for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to applicable rules and regulations of the
Securities and Exchange Commission. These financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended September 30, 1993.
The results of operations for the interim periods reported herein are not
necessarily indicative of results to be expected for the full year.
2. EARNINGS PER SHARE
Earnings per share for the periods ended March 31, 1994 and 1993 is
based on the weighted average number of common and common equivalent shares
outstanding. Common share equivalents include dilutive stock options using the
treasury stock method (computed at the average market price during the periods
indicated). Fully diluted earnings per share do not differ significantly from
primary earnings per share.
The weighted average number of common and common equivalent shares
used in the computation of net income per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average
number of shares
outstanding 41,013,619 40,346,514 40,752,326 40,213,948
Incremental shares
from use of treasury
stock method 173,661 318,030 202,982 368,285
---------- ---------- ---------- ----------
Weighted average common
and common equivalent
shares outstanding 41,187,280 40,664,544 40,955,308 40,582,233
========== ========== ========== ==========
</TABLE>
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3. BUSINESS COMBINATIONS
On December 31, 1993, the Company invested cash of $2,082,800 which
resulted in the Company owning a 63.5% interest in Southwest. Substantially
all of the purchase price was allocated to goodwill and is being amortized on a
straight-line basis over 40 years. The acquisition was accounted for as a
purchase and was included in the Company's operations after December 31, 1993.
On December 31, 1993, the Company acquired 100% of the outstanding
common stock of Atlanta for a total cash purchase price of $2,322,139.
Substantially all of the purchase price was allocated to goodwill and is being
amortized on a straight-line basis over 40 years. The acquisition was
accounted for as a purchase and was included in the Company's operations after
December 31, 1993.
On February 1, 1994, the Company acquired 100% of the outstanding
common stock of Atlanta III for a total cash purchase price of $94,530.
Substantially all of the purchase price was allocated to goodwill and is being
amortized on a straight-line basis over 40 years. The acquisition was
accounted for as a purchase and included in the Company's operations after
February 1, 1994.
On February 1, 1994, the Company acquired 100% of the outstanding
common stock of Atlanta V for a total cash purchase price of $208,005.
Substantially all of the purchase price was allocated to goodwill and is being
amortized on a straight-line basis over 40 years. The acquisition was
accounted for as a purchase and included in the Company's operations after
February 1, 1994.
On March 1, 1994, the Company acquired a 60% interest in Indiana for a
cash purchase price of $2,000,000. Substantially all of the purchase price was
allocated to goodwill and is being amortized on a straight-line basis over 40
years. The acquisition was accounted for as a purchase and included in the
Company's operations after March 1, 1994.
Due to the insignificant operations of Southwest, Atlanta, Atlanta
III, Atlanta V and Indiana, pro forma data has not been included.
4. CONTINGENCIES AND LEGAL MATTERS
The Company in 1992 received a request for documents from a grand jury
sitting in Atlanta, Georgia at the request of the U.S. Department of Health and
Human Services, the focus of which appears to be the potential application of
the Medicare Fraud and Abuse Law as it relates to physician ownership. The
Company has complied with the request and believes that the documents submitted
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will confirm that it has conducted its business affairs in a proper and lawful
manner, consistent with all applicable laws, regulations and professional codes
of conduct. Management believes that the ultimate resolution of this matter
will not have a material adverse effect on the Company's financial position and
results of operations.
Further, the Company and certain of its officers and former officers
are defendants in civil suits filed in 1992 on behalf of individuals claiming
to have purchased T(2) Common Stock during the time period from December 2, 1991
through June 24, 1992. The suits were consolidated into one suit in the United
States District Court for the Northern District Court of Georgia. The
complaint seeks certification of a class of plaintiffs and damages in an
unspecified amount. The complaint alleges, among other things, that the
Company and the named individuals violated various provisions of the Securities
Exchange Act of 1934 and violated certain other laws by failing to make
complete and accurate statements about the Company's business. On November 16,
1993, the proceeding was certified as a class action ("In Re T(2) Shareholder
Litigation").
In 1993, the Company conducted an inquiry which resulted in the
restatement of the Company's interim financial statements for the periods ended
December 31, 1992 and March 31, 1993. Subsequently, the Company and certain of
its officers and directors and former officers and a former director were named
as defendants in seventeen civil suits filed in the United States District
Court for the Northern District of Georgia on behalf of individuals claiming to
have purchased or sold T(2) Common Stock during various time periods in 1991,
1992 and 1993. The complaints, which were generally similar, alleged in part
that the Company made misleading public statements concerning the Company's
business, results of operations, future prospects, revenues and reimbursements
from its payor sources. In September 1993, many of the complaints were
dismissed and a new class action complaint was filed.
On January 14, 1994, the court in In Re T(2) Shareholder Litigation
granted the plaintiffs' motion to amend their complaint to allege violations of
the Securities Exchange Act of 1934 on behalf of a putative class consisting of
purchasers of T(2) Common Stock for the period December 2, 1991, through August
12, 1993. Although the amended complaint has been filed, the court has not yet
ruled on the plaintiffs' motion to expand the previously certified class. Five
other putative class action complaints are pending in the Northern District of
Georgia. In three of these cases, the plaintiffs have consented to a
consolidation of their actions with the In Re T(2) Shareholder Litigation. The
fourth case was consolidated with the In Re T(2) Shareholder Litigation by order
of the Court, and the fifth was filed in April 1994 and remains pending.
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The Company believes that it has meritorious defenses in these
actions. Nevertheless, the ultimate outcome of the litigation described in the
preceding three paragraphs cannot presently be determined and an estimate of
any loss that might result therefrom cannot be made. Accordingly, no provision
for any loss that may result upon resolution of the suits has been made in the
consolidated financial statements.
The Securities and Exchange Commission (the "Commission") is
conducting an inquiry into the events that led to the restatement of the
Company's financial statements for the periods ended December 31, 1992 and
March 31, 1993, and certain other matters. The Commission has requested
certain information relating to such inquiry, and the Company is cooperating.
The Commission can seek certain civil remedies against the Company by way of an
enforcement action.
In connection with both the stockholder litigation and the Commission
inquiry discussed above, the Company has determined to pay the reasonable
attorneys' fees and expenses of certain present and former directors and
officers in advance of the final disposition of the litigation and such inquiry,
subject to each individual's agreement and undertaking to repay his or her share
of the attorney's fees and expenses paid by the Company if it is ultimately
determined that such individual is not entitled to be indemnified by the Company
pursuant to applicable law.
5. DEBENTURE PURCHASE AGREEMENT
In connection with the Company's Debenture Purchase Agreement with
Surgex, Inc., the Company has increased its loan to Surgex as of April 30, 1994
to $11,967,000.
6. AGREEMENT TO MERGE
On February 7, 1994, the Company announced that it had entered into a
definitive agreement providing for the merger of the Company with Curaflex
Health Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion"),
and Medisys, Inc. ("Medisys") and the formation of Coram Healthcare Corporation
("Coram") to serve as the holding company for the combined entities. The
operations of Curaflex, HealthInfusion and Medisys consist primarily of
providing infusion therapy services. Under the terms of the agreement, each
common share of the Company outstanding immediately prior to the effective date
of the merger is expected to be exchanged for .63 shares of common stock of
Coram. Consummation of the proposed transaction is subject to customary
conditions, including approval by the shareholders of each of the four
companies. The parties anticipate that the transaction will be accounted for
as a pooling of interests and that the transaction will be consummated by June
30, 1994.
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7. SUBSEQUENT EVENT
As of May 12, 1994, the Company had agreed in principle to acquire all
of the capital stock of Intracare of Greenville, Inc., an infusion therapy
company currently managed by the Company, for cash of $1,175,000. This
acquisition is expected to be accounted for as a purchase and is expected to be
consummated on or before May 31, 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Total revenues for the three and six-month periods ended March 31,
1994 decreased by 14% and 13%, respectively, compared to the corresponding
periods in the prior year. Home infusion therapy revenues, including
management fees from managed home infusion therapy companies, decreased by 28%
and 27%, respectively, for the three and six-month periods ended March 31, 1994
compared to the corresponding periods in the prior year. Intracare revenues
decreased by 13% and 4%, respectively, for the three and six-month periods
ended March 31, 1994, compared to the corresponding periods in the prior year.
Continued cost reduction initiatives by third party payors, including, but not
limited to, retroactive implementation of case management price discounts,
demands for larger price discounts by indemnity insurance carriers, and demands
for other price discounts, have had and are expected to continue to have a
negative effect on the infusion therapy industry, including the Company.
Although the number of infusion therapy patients served during the three and
six month periods ended March 31, 1994 remained stable compared to the
corresponding periods in the prior year, the Company experienced a significant
reduction in per patient revenue due to pricing and reimbursement pressures
imposed by third party payors, resulting in an overall decrease in infusion
therapy revenue. Such pricing and reimbursement pressures are expected to
continue to have a negative effect on the Company's home infusion therapy and
IntraCare revenues for the foreseeable future.
Lithotripsy revenues increased by 75% and 93%, respectively, for the
three and six-month periods ended March 31, 1994 over the corresponding periods
in the prior year. This increase in lithotripsy revenues was attributable to
an increase in patients served and the acquisition since March 31, 1993 of a
minority interest in one and majority interests in six lithotripsy companies in
which the Company had no prior interest.
While pricing pressures have been primarily related to the Company's
infusion therapy operations, there can be no assurance that similar pricing
pressures will not be applied to the Company's lithotripsy operations. The
Health Care Finance Administration ("HCFA") has issued a proposed rule that
would, if implemented, significantly reduce the amount Medicare would reimburse
its
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<PAGE> 14
beneficiaries for the cost of lithotripsy procedures performed in an ambulatory
surgery center or on an outpatient basis at a hospital. Further, a decrease in
the Medicare reimbursement rate for lithotripsy may trigger demands for similar
reductions by other third party payors.
Costs of revenues increased by 6% and 9%, respectively, for the three
and six-month periods ended March 31, 1994 compared to the periods in the prior
year. This increase was attributable to an increase in infusion therapy
patients served, increased depreciation and the acquisitions and development
mentioned above.
Selling, general and administrative expenses as a percentage of total
revenues increased from 10.7% to 15.9% and from 9.7% to 13.0%, respectively,
for the three and six-month periods ended March 31, 1994, versus the comparable
periods in the prior year. The increase in the percentage of selling, general
and administrative expenses to total revenues is primarily due to the fixed
components of certain selling, general and administrative expenses and the
relative decrease in per patient revenues. In addition, the Company incurred
legal fees and expenses of $1,705,655 and $2,285,691, respectively, for the
three and six-month periods ended March 31, 1994 compared with $674,144 and
$1,377,049, respectively, for the three and six-month periods ended March 31,
1993. The large increase resulted primarily from fees incurred in connection
with, among other matters: (i) the proposed business combination involving
Coram, Curaflex, HealthInfusion and Medisys; (ii) the defense of the Company
and certain officers and directors and certain former officers and directors in
the previously mentioned stockholder litigation; (iii) the representation of
the Company in connection with the previously mentioned inquiries currently
being conducted by certain governmental authorities; and (iv) the advancement
of legal fees and expenses to certain current and former officers and
directors.
The provision for doubtful accounts expressed as a percentage of total
revenues decreased to 4.4% from 10.4% and to 3.9% from 10.8%, respectively, for
the three and six-month periods ended December 31, 1993, versus the
corresponding periods in the prior year. Management regularly reviews the
collectability of the Company's accounts receivable and makes adjustments to
the allowance for doubtful accounts as needed to reflect prevailing conditions.
As case management discounts have become more prevalent and larger numbers of
the Company's patients are treated in accordance with agreements that establish
reimbursement rates in advance, reimbursement patterns have become more
predictable. As a result, accounts receivable write-offs have decreased. The
Company's allowance for doubtful accounts, expressed as a percentage of
accounts receivable was 16% as of March 31, 1994 and as of December 31, 1993,
and 17% as of September 30, 1993.
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The increase in amortization of intangibles for the three and
six-month periods ended March 31, 1994 versus the comparable periods in the
prior year is primarily attributable to the additional goodwill associated with
acquisitions consummated since March 31, 1993 which were accounted for as
purchases.
Income from operations as a percentage of total revenues decreased
from 25.1% to 13.1% and from 28.7% to 19.4%, respectively, for the three and
six-month periods ended March 31, 1994 versus the comparable period in the
prior year. The decrease resulted primarily from an increase in the number and
amount of discounts given to third party payors, including case management
adjustments, managed care pricing and other price discounts. Because of the
current pressures on pricing in the health care industry generally, the Company
expects that, in the foreseeable future, there will continue to be pressures on
income from operations. In addition, continued cost reduction initiatives by
third party payors, significant reductions in coverage and rates of third party
payors, or significant reductions in the percentage of the Company's services
delivered to privately-insured patients could also have a negative effect on
the Company's income from operations.
The effective income tax rate increased from 35.6% to 44.6% and from
36.7% to 43.8%, respectively, for the three and six-month periods ended March
31, 1994 versus the comparable periods in the prior year. The effective income
tax rate was calculated by dividing the provision for income taxes by income
before income taxes less minority interests in the income of partnerships.
Such increases were primarily attributable to the increase in the amortization
of intangibles resulting from acquisitions of entities since March 31, 1993
which were accounted for as purchases and income for the three month period
ended March 31, 1993 including S Corporation income for which no income tax
provision was required. This income resulted from the acquisitions of S
Corporations which were accounted for as poolings of interests.
Minority interest in income of subsidiaries for the three and
six-month periods ended March 31, 1994 increased by 69.0% and 65.0%,
respectively, compared to the corresponding periods in the prior year. This
increase resulted primarily from the Company's acquisition since March 31, 1993
of majority interests in six lithotripsy companies in which the Company had no
prior interests.
Inflation
The Company has not experienced significant increases in either the
cost of supplies or operating expenses due to inflation. Nonetheless, although
inflation has not been a significant factor to date, there can be no assurance
that it will not be in the future.
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Financial Condition as of March 31, 1994
Since its inception, the Company has financed its current operations
through internally generated funds and equity placements. The cash provided by
operating activities was $12,249,914 for the six-month period ended March 31,
1994, and $18,290,897 for the six-month period ended March 31, 1993. As of
March 31, 1994, the Company had cash and short-term investments net of short
term investments pledged to short-term debt totaling approximately $42,121,000.
The Company believes that its presently anticipated short term needs
for operating capital, debt repayments, capital expenditures and cash dividends
will be satisfied by its present funds, internally-generated funds and its line
of credit of $10,000,000. The Company is, however, currently reviewing all of
its relationships with the infusion therapy companies it manages and may
acquire such companies or restructure the management agreements it has with
such companies. If the Company acquires such managed companies, the Company
anticipates borrowing additional funds to finance such acquisitions. In
addition, if the Company is required to acquire the minority interests in its
lithotripsy ventures, or resolves its material pending litigation, the Company
may need to seek additional sources of capital.
Omnibus Budget Reconciliation Act of 1993
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the
"Omnibus Act") was signed into law by the President. The Omnibus Act increased
the corporate tax rate of 34% to 35% as well as made certain other changes to
the corporate tax law, including the deductibility of the amortization of
certain intangible assets. The tax provisions of the Omnibus Act did not have
a significant effect on the financial statements of the Company.
In addition, the Omnibus Act included provisions that prohibit
physicians, beginning on January 1, 1995, from referring their patients, who
receive benefits under the Medicare or Medicaid programs, to entities in which
they have financial interests for certain designated health services. The
Omnibus Act is worded broadly and contains numerous exceptions and technical
terms that are not fully defined and empowers the Secretary of the Department
of Health and Human Services to adopt regulations interpreting and implementing
the Omnibus Act. The Company cannot predict what effect, if any, the
application of such regulations and the Omnibus Act may have on its future
business activities.
Accounting Pronouncement
The Financial Accounting Standards Board has issued Statement No. 115
entitled "Accounting for Certain Investments in Debt and Equity Securities"
which is effective for fiscal years beginning
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after December 15, 1993. This statement is not expected to have any
significant effect on the financial statements of the Company.
Future Health Care Proposals and Legislation
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. The Clinton
Administration has proposed legislation, known as the Health Security Act of
1993, which has been introduced into Congress and is designed to reform the
United States health care system. The Health Security Act proposes a major
restructuring of the health care system, including (i) universal access to
health care and (ii) measures to control or reduce the rate of increase of
public and private spending on health care. Alternative federal health care
reform legislation is being considered by Congress, including a single-payor
approach, "managed competition" proposals, the creation of a "Medicare Part C"
for the uninsured and more incremental approaches to health care reform. In
addition, some of the states in which the Company operates have enacted and
others are considering various health care reform proposals. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 25, 1994, a suit captioned Maurice Kirschenbaum v. T(2)
Medical, Inc., David Hersh, Joseph C. Allegra, James L. Ledbetter and Thomas
E. Haire, Civil Action No. 1:94-CV-1106-RLV (the "Kirschenbaum Action"), was
filed in the United States District Court for the Northern District of Georgia.
The action was filed on behalf of a person claiming to be a stockholder of the
Company and seeks certification of a class of plaintiffs for persons who
bought the Company's common stock during the period from January 21, 1993
through August 11, 1993. In addition to making claims of common law fraud and
negligent misrepresentation, the Kirschenbaum action makes substantially similar
allegations and seeks substantially similar relief as the stockholder
litigation previously filed against the Company and described in Note 4 to the
Condensed Consolidated Financial Statements included in this Quarterly Report.
The Company believes that it has meritorious defenses in the Kirschenbaum
Action and the other similar stockholder actions. Nevertheless, the ultimate
outcome of such
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litigation cannot presently be determined and an estimate of any loss that
might result therefrom cannot be made. Accordingly, no provision for any loss
that may result upon resolution of such suits has been made in the condensed
consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(b Reports on Form 8-K. There were no Current Reports on
Securities and Exchange Commission Form 8-K filed during the three-month period
ended March 31, 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T(2) MEDICAL, INC.
By:/s/ Tommy H. Carter
------------------------------
Tommy H. Carter
President and Chief
Executive Officer
By:/s/ Bruce A. Kolleda
------------------------------
Bruce A. Kolleda
Principal Accounting Officer
Date: May 13, 1994
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