SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 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 DECEMBER 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 0R 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 0-17292
ACCUHEALTH, INC.
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(Exact name of registrant as specified in its charter)
New York 13-3176233
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1575 Bronx River Avenue
Bronx, New York 10460
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 518-9511
Indicate by check mark [X] whether the registrant 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding February 17, 1999
Common Stock, par value $.01 per share 5,080,586 Shares
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ACCUHEALTH, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets at December 31, 1998 and March 31, 1998.... 3
Condensed Consolidated Statements of Operations for the three and
nine months ended December 31, 1998 and 1997..................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 1998 and 1997................................................. 5
Notes to Condensed Consolidated Financial Statements............................. 6 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable........ 15
Part II. OTHER INFORMATION................................................................ 15
SIGNATURES....................................................................... 15
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2
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ACCUHEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS: DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
Current Assets:
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Cash ............................................................. $ 31 $ 249
Marketable Securities ............................................ 3,647 --
Accounts receivable, net ......................................... 15,167 10,299
Inventories ...................................................... 2,969 1,740
Prepaid expenses and other current assets ........................ 452 295
-------------- ------------
Total Current Assets ............................................. 22,266 12,583
Revenue producing equipment, net ..................................... 820 493
Fixed assets, net .................................................... 1,995 2,060
Goodwill, net ........................................................ 1,327 1,401
Other assets ......................................................... 86 529
-------------- ------------
Total Assets ..................................................... 26,494 17,066
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes payable - revolving credit facility ........................ 8,960 4,737
Notes payable - other ............................................ 787 470
Margin Loan payables ............................................. 1,000,002 --
Accounts payable ................................................. 5,143 6,122
Accrued expenses and other current liabilities ................... 2,212 2,154
Current portion of capital lease - Facility ...................... 251 71
Current portion of other capital lease obligations ............... 322 176
-------------- ------------
Total Current Liabilities ........................................ 18,675 13,730
12% Subordinated Debentures .......................................... 6,250 --
Notes payable - term loan ............................................ 750 500
Notes payable - other ................................................ 192 1,070
Capital lease - Facility, less current portion ....................... -- 232
Other capital lease obligations, less current portion ................ 294 315
-------------- ------------
Total Liabilities ................................................ 7,486 15,847
-------------- ------------
Stockholders' Equity:
6% Redeemable cumulative convertible preferred stock $.01 par value;
$2,713,500 liquidation preference, authorized issued and
outstanding 1,350,000 shares ..................................... 1 13
Common stock $0.1 par value; authorized 15,000,000 shares;
3,644,498 and 3,598,000 shares, respectively ..................... 51 36
Additional paid-in capital ....................................... 7,474 7,386
(Deficit) ........................................................ 6,569 (5,592)
-------------- ------------
957 1,843
Less treasury stock (308,004 shares) at cost ..................... 624 624
-------------- ------------
Total Stockholders' Equity ........................................... 333 1,219
-------------- ------------
Total Liabilities and Stockholders' Equity ........................... $ 26,494 $ 17,066
============== ============
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See notes to consolidated financial statements.
3
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ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
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Net sales ........................................................ $ 9,973 $ 8,205 $ 27,460 $ 24,249
Cost of goods sold ............................................... 6,193 5,253 16,478 13,807
----------- ----------- ----------- -----------
Gross profit ..................................................... 3,780 2,952 10,982 10,442
Selling, general and administrative expenses ..................... 3,999 2,792 11,202 9,825
----------- ----------- ----------- -----------
Operating (loss) income .......................................... (219) 160 (220) 617
Interest expense ................................................. 228 219 877 591
----------- ----------- ----------- -----------
Income (loss) before income taxes ................................ (447) (59) (1,097) 26
Provision for income taxes ....................................... -- 162 -- 162
----------- ----------- ----------- -----------
Net income (loss) ................................................ $ (447) $ (221) $ (1,097) $ (136)
=========== =========== =========== ===========
Income (loss) per common share, applicable to common shareholders:
Basic - continuing operations .................................... $ (.13) $ (.14) $ (.33) $ (.09)
=========== =========== =========== ===========
Diluted - continuing operations .................................. $ (.13) $ (.12) $ (.32) $ (.07)
=========== =========== =========== ===========
Weighted number of common shares and equivalents outstanding:
Basic ........................................................... 3,336,494 1,548,205 3,276,871 1,548,205
Diluted ......................................................... 3,441,880 1,837,481 3,382,257 1,837,481
See notes to consolidated financial statements.
4
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ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
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NINE MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
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Net income (loss) ............................................... $ (650) $ (77)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ............................... 308 280
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ......................................... (3,909) (2,428)
Inventories ................................................. (109) (150)
Prepaid expenses and other current assets ................... (125) 296
Other assets ................................................ 429 (920)
Accounts payable ............................................ (380) 820
Accrued expenses and other current liabilities .............. 37 243
-------- --------
Cash provided (used) by operating activities ................ (4,399) (1,936)
-------- --------
INVESTING ACTIVITIES:
Purchase of fixed assets .................................... (186) (249)
Purchase of marketable securities ........................... (4,300) --
Net change in goodwill ...................................... (68) (15)
-------- --------
Cash (used in) provided by investing activities ............. 4,554 (264)
-------- --------
FINANCING ACTIVITIES:
Proceeds from note payable - revolving credit facility ...... 15,990 10,650
Proceeds from subordinated debentures ....................... 5,750 --
Proceeds from term loan ..................................... 250 --
Payments on notes payable - revolving credit facility ....... (12,839) (9,739)
Proceeds (Payments) on notes payable - other ................ (287) 615
Principal payments on capital lease - Facility .............. (36) (36)
Issuance of capital stock ................................... 74 996
Payments on other capital lease obligations ................. (147) 235
-------- --------
Cash provided by (used in) financing activities ............. 8,755 2,249
-------- --------
Net increase (decrease) in cash ............................. (198) 49
Cash at beginning of period ................................. 249 309
-------- --------
Cash at end of period ....................................... $ 51 $ 358
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................... $ 415 $ 350
-------- --------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Additions to capital leases ................................. $ 121 $ 130
-------- --------
Accrued dividends and accretion on redeemable preferred stock $ 27 $ 40
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</TABLE>
See notes to condensed consolidated financial statements.
5
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ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Accuhealth, Inc. and its subsidiaries, all of which are wholly owned (the
"Company"). Significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and principally with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the periods reported have been included. Operating results for
the nine-month period ended December 31, 1998 may not be indicative of the
results for the full fiscal year.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Form 10-K for the fiscal
year ended March 31, 1998 filed with the Securities and Exchange Commission. The
balance sheet at March 31, 1998 has been derived from the audited financial
statements at that date.
ACCOUNTS RECEIVABLE
Accounts receivable are principally due from third party payors, primarily
governmental agencies (Medicare and Medicaid), managed care organizations and
private insurance companies.
INVENTORIES
Inventories consist of over-the-counter and prescriptions drugs, infusion
products and supplies, and home health care equipment and supplies and are
priced at the lower of cost or market using the first-in, first-out ("FIFO")
method.
EARNINGS PER SHARE
For the three months and nine months ended December 31, 1998 and 1997, basic
income (loss) per share has been calculated by dividing the net income (loss)
applicable to common stock by the weighted average of common stock and common
stock equivalents outstanding during the period. Dividends attributable to the
redeemable preferred stock were $3,150, and $40,500, respectively, for the three
months ended December 31, 1998 and 1997 and $19,800 and $121,5,00, respectively,
for the nine months ended December 31, 1998 and 1997. Net income (loss)
applicable to common stockholders for the three months ended December 31, 1998
and 1997, respectively, were ($447,000) and $29,000, and ($1,097,000) and
$219,000 for the nine months ended December 31, 1998 and 1997, respectively. On
a fully diluted basis, both the net income (loss) and shares outstanding, if
applicable, are adjusted to assume the conversion of convertible preferred stock
from the date of issue and for the incremental option shares for fully diluted
purposes (See Note 4).
During the year ended March 31, 1998, the Company adopted the provision of
statements of accounting standards No. 128 Earnings per Share ("SFAS No. 128").
SFAS No. 128 eliminates the presentation of primary and fully diluted earnings
per share ("EPS") and requires presentation of basic and diluted EPS. Basic EPS
is computed by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
is computed by dividing the weighted average number of common shares and common
stock equivalents outstanding at year-end. Common stock equivalents have been
excluded from the weighted-average shares for 1998, 1997 and 1996, as inclusion
is anti-dilutive. Potentially diluted securities, which consist of stock options
and warrants, may be potentially diluted in the future. All prior period EPS
data has been restated to conform to the new pronouncement.
6
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ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
INCOME TAXES
The Company files consolidated Federal, combined New York State and combined New
York City income tax returns. The Company's method of accounting for income
taxes is the liability method required by FASB Statement No. 109 "Accounting for
Income Taxes."
MAJOR CUSTOMER
The Company's revenues from one customer accounted for 5.5% and 15% of the
Company's net sales for the three months ended December 31, 1998 and 1997,
respectively. And 6.5% and 16.5% for the nine months ended December 31, 1998 and
1997, respectively. At December 31, 1998, this customer represented
approximately 2.3% of the Company's gross receivables.
BUSINESS COMBINATION
On April 9, 1998, the Company completed a merger with Healix Healthcare, Inc.
("Healix") whereby 1,488,850 shares of the Company's common stock were exchanged
for all of the outstanding common stock of Healix. Each share of Healix common
stock was exchanged for .740721 shares of the Company's common stock. The merger
constituted a tax-free organization and has been accounted for as a pooling of
interests. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Healix as though it had always been a part
of the Company.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements for prior periods are as
follows:
Nine Months Ended
December 31, 1998
-----------------
Net sales
Accuhealth ...................... $ 16,476
Healix .......................... 10,984
----------------
Combined ............... $ 27,460
================
Net income (loss)
Accuhealth ...................... $ 103,000
Healix .......................... (1,200,000)
----------------
Combined ............... $ (1,097,000)
================
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NOTE 2 - NOTES PAYABLE, SUBORDINATED DEBENTURES PAYABLE AND
CAPITAL LEASE OBLIGATIONS
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Long-term debt at December 31, 1998 consists of the following:
12% Subordinated Debentures, interest payable
quarterly, maturing July, August and October, 2003 ..................... $6,250,000
Notes payable to vendors bearing interest ranging
from 10.5% to 12% with monthly payments totaling
$18,509 until July 2000 ................................................. 463,500
Notes payable bearing interest ranging from
10% to 14.5% with monthly payments totaling $40,714 until February 2000 353,695
7
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ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
Notes payable to a Bank bearing interest at rates
ranging from 2.9% to 10.25% with monthly payments
totaling $3,748 due through August 1999 ................................. 35,342
Note payable to a stockholder bearing interest
at 9.75%. There are no scheduled repayment terms
and payments are made monthly for interest only ......................... 52,500
Note payable bearing interest at 10.95%, monthly
payment of $6,484, from March 1997 to December 1998 .................... 25,854
Note payable bearing interest at 10.375%, monthly
payment of $925, from February 1997 to
December 2000. The loan is personally guaranteed
by the Company's stockholders ........................................... 22,288
Note payable bearing interest at 10.375%, monthly
payment of $1,491 from February 1997 to
December 2000. The loan is personally guaranteed
by the Company's stockholders ........................................... 35,775
----------
Total Long Term Debt .............................................. 7,238,954
Less: current maturities ......................................... 787,175
----------
Long Term Debt, net of current maturities ......................... $6,451,779
==========
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NOTES PAYABLE - REVOLVING CREDIT FACILITY AND TERM LOAN
In April 1994, the Company entered into a Loan and Security Agreement (the
"Agreement") with Rosenthal and Rosenthal ("Rosenthal") to borrow, under certain
conditions and terms, up to $2,500,000 at an interest rate of prime plus 4-7/8%.
Borrowings under the Agreement are collateralized by certain assets of the
Company, including accounts receivables, inventories, equipment and fixtures.
The Company's ability to use this revolving credit facility is dependent upon
the level of its eligible receivables, as defined in the Agreement. In addition,
the Company granted Rosenthal warrants to purchase 70,000 shares of the
Company's common stock.
Effective February 1, 1996, the Company and Rosenthal amended the Loan and
Security Agreement (the "Amendment"). The Amendment extended the Agreement
through April 28, 1997 and allowed the Company to borrow, under certain
conditions and terms up to $3,500,000 (based on eligible accounts receivable, as
defined) at an interest rate of prime plus 3-7/8%. Effective February 1, 1997,
the Company and Rosenthal amended the Loan and Security Agreement ("Amendment
No. 2") to extend the Agreement through April 1, 1998 and reduce the interest
rate to prime (8 1/2% at March 31, 1997) plus 2 7/8%. In addition, the Company
granted Rosenthal warrants to purchase an additional 30,000 shares of the
Company's common stock Commencing April 28, 1996, the Company was required to
pay a facility fee of $35,000 per annum, which Amendment No. 2 has increased to
$40,000 per annum.
Amendment No. 2 also provided a $500,000 term loan to the Company due on April
1, 1998 with interest payable monthly at a rate of prime plus 5%.
Effective April 3, 1998, the Company agreed to an amendment of the Loan and
Security Agreement. The amendment extended the agreement through April 1, 2000
and allows the Company to borrow, under certain conditions and terms, up to $9
million under a revolving loan agreement at an interest rate of prime plus 1
1/2%, as well as an overdraft line of $1,000,000 at prime plus 3%. The amendment
also increased the term loan available to the Company to $750,000. In addition,
the Company granted Rosenthal warrants to purchase 50,000 shares of the
Company's common stock.
CAPITAL LEASE OBLIGATIONS
The Company leases its principal offices and warehouse facility and certain
equipment, furniture and fixtures, rental equipment and leasehold improvements
under capital lease agreements which extend through September 30, 2001.
8
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ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
CAPITAL LEASE - FACILITY
The Company occupies a pharmacy warehouse and office facility (the "Facility")
which was obtained under a ten-year lease (the "Lease Agreement") with the New
York City Industrial Development Agency (the "Agency") as lessor. The Agency
issued to National Westminster Bank, USA (now "Fleet") $1,072,500 principal
amount of its Industrial Development bonds (the "Bonds") pursuant to an
Indenture of Mortgage and Agreement dated April 1, 1989 (the "Indenture") which
created a lien on the facility. The Company also paid $227,500 in order for the
Agency to purchase the warehouse. This amount and other acquisition costs are
capitalized as land and building under capital lease.
At the end of the term of the lease, the Company may purchase the Facility for
one dollar so long as all terms and conditions of the lease have been met. The
Lease Agreement and Guaranty Agreement require the Company and its subsidiaries
to comply with certain covenants, including but not limited to, maximum debt to
worth ratio, maximum allowable losses and debt service coverage ratio. The
Company's non-compliance with such covenants was waived by Fleet through April
1, 1999.
In lieu of rent the Company pays principal on the Bonds in quarterly
installments of $17,875, plus interest at the rate of prime (8 1/4% at June 30,
1998) plus 1%. On April 28, 1994, in conjunction with the Rosenthal financing
the Company made an additional principal payment of $143,000. A final balloon
payment of $232,375 plus interest thereon is due on April 1, 1999. Each of the
Company's wholly owned subsidiaries has guaranteed the Company's obligations
under the lease. The Lease Agreement and Guaranty Agreement also restrict the
payment of cash dividends in any one year to an aggregate amount not to exceed
25% of the Company's net income for the immediately preceding year.
OTHER CAPITAL LEASES
The Company leases durable medical equipment under capital lease agreements that
extend through November 30, 2001.
NOTE 3 - CONTINGENCIES
The Company is not aware of any existing contingencies that would have an
adverse material effect on its consolidated financial position, results of
operations or cash flows.
NOTE 4 - 6% REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
On December 14, 1994 and January 30, 1995, the Company completed the sale at
$2.00 per share of 1,325,000 shares of redeemable convertible preferred stock
("Preferred Stock") with a 6% per annum cumulative dividend. During the quarter
ended December 31, 1995, the Company sold at $2.50 per share 25,000 additional
shares of Preferred Stock to certain officers and directors of the Company. The
Preferred Stock is convertible at any time at the option of the holder, subject
to anti-dilution adjustments, into 1,350,000 shares of common stock. The Company
has reserved 1,350,000 shares of common stock for such conversion. At any time
on or after December 31, 1995, subject to certain conditions, such as the
registration of the underlying common stock under the Securities Act of 1933,
compliance with the terms of the Preferred Stock and any other agreement with
the holders of the Preferred Stock and the payment of all dividends that are
accrued and unpaid on the Preferred Stock as of the Redemption Date, the Company
may redeem all or any portion of the Preferred Stock then outstanding. For each
share that is called for redemption, the Company shall pay $3.00 per share from
December 31, 1995 through December 31, 1997 and $4.00 per share on or after
January 1, 1998. The holders of the Preferred Stock are entitled to voting
rights equivalent to that of the common stock. The Preferred Stock is senior to
the common stock in the event of a liquidation of the Company. The liquidation
preference is $2.00 per share plus accrued and unpaid dividends.
The Company is obligated to pay annual dividends of $.12 per share on its
1,350,000 outstanding shares of Preferred Stock. Such dividends accrue daily,
are payable each June 1 and December 1 and, at the election of the Company, may
be paid in shares of Common Stock valued in accordance with the terms of such
stock. Dividends on the Company's Preferred Stock are payable in preference and
priority to any payment of any dividends on the common stock.
9
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ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
The June 1, 1998 dividend was paid out in 46,526 shares of common stock on
November 11, 1998. Accrued and unpaid dividends are included in accrued expenses
and other current liabilities at December 31, 1998. The Company has offered and
the majority of preferred shareholders opted to convert a total of 1,245,000
preferred shares into 1,431,750 common shares effective December 1, 1998. This
represented a premium of 15% to the preferred shareholders.
NOTE 5 - 12% SUBORDINATED DEBENTURES
On July 14, 1998 the Company entered into a Note Purchase Agreement with RFE
Investment Partners L.P., (""RFE") whereby RFE purchased $5,000,000 of the
Company's 12% Subordinated Debentures. On August 21, 1998, Amendment No. 1 to
the Note Purchase Agreement was executed, whereby Sterling/Carl marks Capital,
Inc. was added as an "Additional Purchaser". Sterling/Carl marks Capital, Inc.
purchased an additional $750,000 of 12% Subordinated Debentures. On October 26,
1998, Amendment No. 2 to the Note Purchase Agreement was executed, whereby
Austin Marxe was added as an "Additional Purchaser". Austin Marxe purchased an
additional $500,000 of 12% Subordinated Debentures.
Terms and conditions relative to the debenture include the following:
Interest on the debentures is payable quarterly, in arrears. The Company may, at
its sole discretion, accrue up to six quarterly interest payments, which would
otherwise be due, until the maturity date. Such accrued interest payments shall
bear interest at the same rate and are payable on the same terms as original
interest on the debentures.
Maturity dates on the above debentures are July 14, August 26, and October 26,
2003 for RFE, Sterling/Carl Marks Capital, Inc., and Austin Marxe, respectively.
NOTE 6 - PROVISION FOR UNCOLLECTIBLE AMOUNT DUE FROM MAJOR CUSTOMER
Since December 1996, the Company has been providing services to HIP Health Plan
of New Jersey ("HIP"). These services include such items as the provision of
infusion therapy, skilled nursing, home health aides, durable medical equipment
and supplies. In addition, within our engagement with HIP, the Company "manages"
a local network of alternate site health care providers ("subcontractors") who
are used in certain circumstances. These circumstances include those instances
where the Company determines that the provision of health care services to a
particular HIP patient may be more effectively or efficiently provided by a
locally based company. Typically, the arrangement calls for the subcontractor to
invoice the Company for these services and then in turn, the Company bills HIP
for the services it and the subcontractor together provide.
In October 1997, HIP entered into a contract with Pinnacle Health Enterprises,
("PHE"), a subsidiary of PHP Health Care Corporation (PHP), wherein PHE would
manage the medical risk and provide all the health care services and supplies to
HIP members and pay claims and contracts with providers on behalf of HIP.
HIP requested that the Company coordinate its HIP network management and
provider services and forward its invoices to PHE for processing and payment. No
agreement was ever formally entered into with PHE and our letter of agreement
has remained with HIP.
On October 27, 1998, the New Jersey State Commissioners of Banking and Insurance
and the Commissioner of the Department of Health and Senior Services jointly
brought an application before Chancery Division/Middlesex County for an order
appointing the Commissioner of the Department of Banking and Insurance as
Rehabilitator of HIP of New Jersey, Inc. doing business as HIP Health Plan of
New Jersey.
10
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ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
As a provision of this order, all providers of health care services to HIP
members, either directly or through a network relationship, are required to
continue to provide such health care services until further notice. Further, the
Commissioner of Health and Senior Services has written to all of HIP's providers
stating that it is the State's "intention to work vigorously to ensure that
payments to providers are made timely and are a top priority".
On November 19, 1998, PHP Healthcare Corp., including Pinnacle Health
Enterprises filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
This action followed HIP's announced intention to terminate its Health Services
Agreement with Pinnacle.
Currently, the amount owed by HIP/PHE to the Company is approximately $1.5
million. Although we have recently received several payments on our outstanding
invoices due from HIP/PHE, management is unable to determine with any certainty
whether we will collect some or all of the remaining balance due.
Accordingly, the Company has increased its allowance for doubtful accounts by
$1.0 million.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management's Discussion and Analysis should be read in conjunction with the
condensed consolidated financial statements of the Company and related notes
included elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
The results for the three and nine months ended December 31, 1998 reflect the
Company's merger with Healix Healthcare, Inc. on April 9, 1998. As indicated in
Note 1 of this Form 10-Q, the merger has been accounted for as a pooling of
interests. Accordingly, the results for the three and nine months ended December
31, 1997, have been restated to include the combined results of operations of
Healix as though it had always been a part of the Company.
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net sales increased approximately $1,768,000 or 18% from the comparable 1997
quarter to $9.97 million for the three months ended December 31, 1998. The
increase was the result of increases of approximately $2,000,000 and $400,000 in
the Company's oral medication and durable medical equipment revenues, partially,
offset, by a decrease in the Company's Infusion Services and Patient Care
Services of approximately $632,000.
Gross profit for the three months ended December 31, 1998 and 1997 was
approximately $3.78 and $2.95 million, respectively. Representing approximately
37% of net sales for the three months ended December 31, 1998 as compared to
36%, for the comparable prior year. Gross profit decreased primarily due to a
decrease in higher margin infusion sales and an increase in lower margin oral
medication and institutional pharmacy sales.
Selling, general and administrative expenses ("SG&A") were approximately $3.99
and $2.79 million or approximately 40% and 34% of net sales for the three months
ended December 31, 1998 and 1997, respectively. The increases were primarily due
to increases in salaries, delivery and other expenses of approximately $1.20
million.
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net sales for the nine months ended December 31, 1998 increased approximately
$3.21 million or 12% from the comparable 1997 period to 27.5 million. The
increase was the result of increases of approximately $3.00 million and $1.00
million in the Company's oral medication and durable medical equipment revenues,
partially offset by a decrease in the Company's infusion and patient care
service revenues of approximately $879,000.
Gross profit for the nine months ended December 31, 1998 and 1997 was
approximately $10.982 and $10.442 million, respectively. Representing
approximately 39% of net sales for the nine months ended December 31, 1998 as
compared to 43% for the nine months ended December 31, 1997. Gross profit
decreased primarily due to a decrease in higher margin infusion sales and an
increase in lower margin oral medication and institutional pharmacy sales.
Selling, general and administrative expenses ("SG&A") were approximately $11.202
and $9.82 million or approximately 41% and 41% of net sales for the nine months
ended December 31, 1998 and 1997, respectively. The increase was primarily due
to increases in salaries, delivery and other expenses of approximately $1.4
million.
INTEREST EXPENSE. Net interest increased by $9,000 and $286,000 for the three
and nine months ended December 31, 1998. This increase is primarily a result of
increased borrowing under the Company's lines of credit, which is in accord with
the growth in accounts receivable, as well as the issuance of the Company's 12%
subordinated debentures during the quarter.
PROVISION FOR INCOME TAXES.
No provision of income taxes has been reflected due to the Company's federal and
state net operating loss credits.
12
<PAGE>
FINANCIAL CONDITION
As of September 30, 1998, the Company had working capital of approximately $3.6
million.
The Company's cash provided by financing activities of approximately $8.8
million was primarily attributable to the net proceeds of approximately $3
million under the Company's revolving credit facility and term loan and
approximately $5.8 million from the issuance of 12% subordinated debentures,
offset by principal payments on capital leases and other notes payable.
Accounts receivable include amounts due from third party payors, primarily
governmental agencies (Medicare and Medicaid). At September 30, 1998, gross
Medicare and Medicaid receivables aggregated $6.0 million.
Effective April 3, 1998, the Company agreed to an amendment of the Loan and
Security Agreement. The amendment extended the agreement through April 1, 2000
and allows the Company to borrow, under certain conditions and terms, up to $9
million under a revolving loan agreement at an interest rate of prime plus 1
1/2%, as well as an overdraft line of $1,000,000 at prime plus 3%. The amendment
also increased the term loan available to the Company to $750,000. In addition,
the Company granted Rosenthal warrants to purchase 50,000 shares of the
Company's common stock.
At its meeting of the Board of Directors on June 25, 1998, the Company approved
the issuance of 12% Cumulative Convertible Subordinated Notes in the face amount
of $6,250,000. On July 14, 1995, the Company completed the Note Purchase
Agreement relative to the 12% Subordinated Debentures (See Note 5), in addition
to 1, 245,000 preferred shares converted. As a further component of this
financing, the majority of the Company's current 6% Cumulative Convertible
Preferred Stock was converted to common stock at a 15% discount to the original
conversion price of $2.00. This conversion was effective December 1, 1998.
Accordingly, an additional 186,750 shares were issued.
Year 2000 Readiness
The Company has completed its assessment of its computer systems and facilities
that could be affected by the "Year 2000 problem" and has developed a plan to
resolve the issue. The Year 2000 problem arose because many existing computer
programs use only the last two digits to refer to a year. Therefore, these
computer programs do not properly recognize a year that begins with "20" instead
of the familiar "19." If not corrected, many computer applications could fail or
create erroneous results.
The Company is implementing its Year 2000 compliance program as part of a plan
to replace and upgrade its information technology systems (the "Upgrade
Program"). The Upgrade Program was initiated to replace information systems of
certain subsidiaries of the Company acquired by merger, to fully integrate those
systems with the Company's information technology systems, and to update the
Company's information technology systems. The Company has divided the Upgrade
Program into the following phases: assessment, planning, remediation and
testing. The Company is currently approximately 30% complete with the Upgrade
Program and anticipates being complete with all phases of the Upgrade Program,
including Year 2000 compliance, by the fourth quarter of 1999. Although the
Company believes that it will complete the Upgrade Program by the fourth quarter
of 1999, there can be no assurance that such remediation will be completed or
that the Company's operations will not be disrupted to some degree.
The Company currently expects the Upgrade Program to be completed in a time
frame to avoid any material adverse effect on operations. As of December 31,
1998, the Company had incurred approximately $160,000 of expenses in connection
with the Upgrade Program. The Company expects to incur additional expenses of
approximately $400,000 to complete the implementation of the Upgrade Program.
The Company would have implemented the Upgrade Program irrespective of the Year
2000 problem, and although the Company expects that the implementation of the
Upgrade Program will achieve Year 2000 compliance, the Company cannot separately
assess the expenses relating to Year 2000 compliance. The Company's inability to
complete Year 2000 compliance on a timely basis or the inability of other
companies with which the Company does business to complete their Year 2000
modifications on a timely basis could adversely affect the Company's operations.
13
<PAGE>
The Company has initiated communications with its major vendors to identify and,
to the extent possible, to resolve issues involving the Year 2000 Problem. The
Company is attempting to mitigate its risk with respect to the failure of such
vendors to be Year 2000 compliant by, among other things, obtaining Year 2000
compliance certifications or written assurances from its material vendors.
However, the Company has limited or no control over the actions of these
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 Problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these suppliers to resolve Year
2000 Problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition, and results of
operation.
Management believes that the most significant risk to the Company from the Year
2000 Problem is the effect such issues may have on third party payors, such as
Medicare. News reports have indicated that various agencies of the federal
government may have difficulty becoming Year 2000 compliant before the Year
2000. The Company has not yet undertaken to quantify the effects of such
noncompliance or to determine whether such quantification is even possible. The
Company has initiated communications with its third party payors to identify
and, to the extent possible, to resolve issues involving the Year 2000 problem.
However, the Company has limited or no control over the actions of these third
party payors. Thus, while the Company expects that it will be able to resolve
any significant Year 2000 problems with these payors, there can be no assurance
that these payors will resolve any or all Year 2000 problems with their systems
before the occurrence of a material disruption to the business of the Company.
Any failure of these third party payors to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse effect on the Company's
business, financial condition, and results of operation.
The Company is in the process of generating a Year 2000 contingency plan in the
event compliance is not achieved. In connection therewith, the Company expects
to identify reasonably likely scenarios which could arise in the event of the
Company's Year 2000 noncompliance. Once these scenarios have been identified,
the Company will develop plans in an attempt to reduce the impact of these
noncompliance scenarios on the Company and its core functions. The Company
expects to be substantially complete with this contingency plan by the third
quarter of 1999. However, there can be no assurance that this contingency plan
will be completed on a timely basis or that such a plan will protect the Company
from experiencing a material adverse effect on its financial condition or
results of operations.
Potential consequences of the Company's failure to timely resolve its Year 2000
issues could include, among others, (i) the inability to accurately and timely
process claims, respond to third party payor inquiries about claims, enroll
customers, bill third party payors, collect receivables, pay vendors, record and
disclose accurate data and perform other core functions, (ii) increased scrutiny
by regulators and breach of contractual obligations, and (iii) litigations in
connection therewith.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information in Items 1 and 2 of Part I
of this Form 10-Q include information that is forward looking, such as the
Company's plans to obtain additional financing. The matters referred to in
forward looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the Company's
Year 2000 readiness, the impact of the cost containment efforts of third-party
payors and the Company's ability to obtain and maintain required licenses.
Subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-Q.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company's current report on Form 8-K, date of report
April 9, 1998 and filed on June 24, 1998, reporting on
Item 1 Note 1 to condensed consolidated financial
statements regarding the business combination.
(c) The Company's current report on Form 8-K, date of report
April 9, 1998 and filed on April 17, 1998, reporting on a
change of auditors for its fiscal year ending March 31,
1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACCUHEALTH, INC.
Date: February 22, 1999 By: /s/ GLENN C. DAVIS
---------------------------------------
Glenn C. Davis, as
President and Chief Executive Officer
Date: February 22, 1999 By: /s/ PRISCO J. DEMERCURIO
-------------------------------------
Prisco J. DeMercurio
Senior Vice President - Finance
Chief Financial Officer
15
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