<PAGE>
KAUFMAN GOLDSTEIN & GARNTER, P.C.
342 MADISON AVENUE, SUITE 1660
NEW YORK, NEW YORK 10173
(212) 490-6080
May 14, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Care Group
Form 10-Q
Gentlemen:
On behalf of our client, The Care Group, Inc., we herewith electronically
file Form 10-Q for the fiscal quarter eneded March 31, 1996.
Very truly yours,
/s/ Michael Harvey
Michael Harvey
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996 Commission file number 0-17821
The Care Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2962027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Hollow Lane, Lake Success, New York, N.Y. 11042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 516-869-8383
N/A
(Former name, former address and former fiscal year, if
changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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
As of May 6, 1996, the registrant had 8,330,385 shares of common stock,
$.001 par value per share, outstanding.
Page 1 of 13 pages
<PAGE>
THE CARE GROUP, INC.
AND
SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1996
PART I
FINANCIAL INFORMATION
Page 2 of 13 pages
<PAGE>
THE CARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share data)
March 31, December 31,
1996 1995
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 609 $ 561
Marketable securities 284 508
Accounts receivable, net of allowances
of $3,215 at March 31, 1996 and $3,564 at
December 31, 1995 14,380 14,927
Inventories 2,221 1,763
Prepaid expenses and other current assets 580
793
Total Current Assets 18,074 18,552
PROPERTY AND EQUIPMENT - at cost 3,122 3,000
LESS - Accumulated depreciation 1,335 1,253
Net property and equipment 1,787 1,747
RENTAL EQUIPMENT - at cost 2,507 2,416
LESS - Accumulated depreciation 708 620
Net rental equipment 1,799 1,796
INTANGIBLES - Net 14,107 14,185
OTHER ASSETS 810 730
TOTAL ASSETS $ 36,577 $ 37,010
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,145 $ 1,845
Accounts payable 1,667 1,302
Accrued expenses 545 950
Total Current Liabilities 4,357 4,097
NOTE PAYABLE TO BANK 6,500 6,800
LONG-TERM DEBT, excluding current portion 995
1,400
DEFERRED INCOME TAXES 391 322
TOTAL LIABILITIES
12,243 12,619
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK , 333,332 shares at $3 per share
1,000 1,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value per share, 1,000
shares authorized; no shares issued and outstanding -- --
Common Stock, $.001 par value per share, 20,000 shares authorized; 8,638
shares issued and outstanding at March 31, 1996 and December 31, 1995
9 9
Additional Paid-In-Capital 19,886 19,886
Retained Earnings 4,665 4,604
24,560 24,499
Common Stock held in treasury, at cost - (307 and 247 shares at March 31, 1996
and December 31, 1995,
respectively) (1,226) (1,108)
Total Stockholders' Equity 23,334 23,391
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,577 $ 37,010
</TABLE>
See notes to consolidated financial statements.
Page 3 of 13 pages
<PAGE>
THE CARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
(In thousands, except 1996 1995
per share data) (Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUES $ 9,235 $ 10,037
COST OF REVENUES 4,301 5,311
GROSS PROFIT 4,934 4,726
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,609 4,269
OPERATING INCOME 325 457
INTEREST:
Interest income 3 10
Interest expense (161) (159)
Net Interest Expense (158) (149)
INCOME BEFORE PROVISION
FOR INCOME TAXES 167 308
PROVISION FOR INCOME TAXES 106 167
NET INCOME $ 61 $ 141
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARES $ .01 $ .02
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 8,462 8,293
</TABLE>
See notes to consolidated financial statements.
Page 4 of 13 pages
<PAGE>
THE CARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Three Months Ended March 31,
------------------------------------
(In thousands)
1996 1995
(Unaudited) (Unaudited)
-----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 61 $ 141
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 294 309
Provision for contractual allowances and bad debts 395
297
Deferred income tax expense 69 147
Unrealized gain on marketable securities (58) (3)
Loss on sale of marketable securities 60 23
Changes in assets and liabilities;
Marketable securities 222 (46)
Accounts receivable 152 (278)
Inventories (458) (267)
Prepaid expenses and other current assets 226 (106)
Other assets (6) (35)
Accounts payable 365 (453)
Accrued expenses (405) (102)
Income taxes payable -- (51)
Net purchases of rental equipment (91) (268)
Net cash provided by (used in) operating activities 826
INVESTING ACTIVITIES:
Purchases of property and equipment (124) (242)
Payments for intangible assets acquired (45) --
Organization costs (12) --
Restrictive covenant -- (66)
Investment in certified home health agency (74) --
Net cash used in investing activities (255) (308)
FINANCING ACTIVITIES:
Proceeds from bank loan 150 400
Repayments of bank loan (450) --
Repayment of long-term debt (105) (92)
Proceeds from exercise of stock options -- 527
Purchase of treasury stock (118) (200)
Sale of treasury stock -- 89
Net cash (used in) provided by financing activities (523) 724
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 48 (276)
CASH AND CASH EQUIVALENTS, beginning of year 561 577
CASH AND CASH EQUIVALENTS, end of year $ 609 $ 301
Supplemental disclosure of cash flow information:
Interest Paid $ 161 $ 159
Taxes Paid $ 106 $ 181
</TABLE>
See notes to consolidated financial statements.
Page 5 of 13 pages
<PAGE>
THE CARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Rental Equipment
Rental equipment consists of medical equipment rented to patients for use
in their homes and is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the equipment, which
range from six to seven years.
(b) Reclassifications
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the presentation in the 1996 consolidated financial
statements.
NOTE 3 - BANK LOAN
At March 31, 1996, the Company was in default of certain financial
convenants specified in the amended credit agreement with the bank and received
a waiver from the bank for these covenants for the fiscal quarter ended March
31, 1996. The waiver requires, among other things, the Company to raise
additional capital in an equity offering on or before June 30, 1996.
NOTE 4 - COMMITMENTS
On September 22, 1994, the Company entered into a stock acquisition
agreement to acquire all of the outstanding common stock of a certified home
health agency. The purchase price, as amended in February 1995, is for $700,000
plus net operating expenses paid by the Company prior to such acquisition. The
Company has made deposit payments of approximately $75,000 and $63,000 in 1995
and 1994, respectively, and has paid approximately $74,000 and $396,000 in net
operating expenses of the certified home health agency during 1996 and 1995,
respectively. These amounts are included in "Other Assets" at March 31, 1996.
The remaining purchase price is
Page 6 of 13
<PAGE>
payable one-half at closing, as defined, and one-half within one year from the
closing date, with interest at 8 percent per annum. Pursuant to the terms of the
agreement, as amended, the acquisition is subject to certain contingencies. If
the acquisition is not approved, a portion of the purchase price paid in advance
($63,000) and amounts paid to fund the operations of the certified home health
agency are refundable.
NOTE 5 - LITIGATION
On May 18, 1994, the Company acquired all the stock of Advanced Care
Associates, Inc., Advanced Care CPM, Inc. and Millwo Inc. ("Advanced Care") for
aggregate consideration of $5,268,000, of which $3,000,000 was in the form of
promissory notes due in twenty-four equal monthly installments beginning July
10, 1995.
On September 30, 1994, Advanced Care and its former owners were served with
a civil lawsuit by the Department of Justice (United States District Court of
Pennsylvania, Eastern District) alleging improper Medicare billing and
reimbursement practices during some or all of the period from January 1989
through May 1994. All allegations in the complaint involve the time prior to
Advanced Care's acquisition by the Company. The government is currently seeking
unspecified monetary damages. Pursuant to the terms of the purchase agreement,
the Company is indemnified by the prior owners of Advanced Care from and against
activities of Advanced Care prior to its acquisition. The Company has advised
the previous owners that they will be held responsible for this claim pursuant
to the indemnification agreement. The agreement also provides that in the event
indemnification is required, the Company has the right to reduce the outstanding
principal amounts due by the indemnified amounts, including legal and other
costs of litigation. As of March 31, 1996 and December 31, 1995, the Company has
incurred costs relating to this litigation of approximately $603,000 and
$579,000, which have been offset against the $3,000,000 subordinated promissory
notes at March 31, 1996 and December 31, 1995, respectively.
In connection with the purchase agreement, a put option was issued for the
333,332 shares of common stock at $3 per share, or $1 million, exercisable
beginning after May 18, 1996. In March 1996, an informal agreement in principle
has been reached among the parties, subject to negotiation and execution of a
definitive agreement. Such agreement provides for a transfer of the 333,332
shares of common stock and assignment of the put at $3 per share from the former
owners of Advanced Care to the government. The value of the shares of common
stock subject to the put option, $1 million, is included in "Redeemable Common
Stock" at March 31, 1996 and December 31, 1995.
Page 7 of 13
<PAGE>
As discussed above, the Company is currently in the process of settling the
litigation and expects to enter into a final settlement agreement during the
second quarter of 1996, although there can be no assurance. Management believes
that the outcome of this matter will not have a material adverse effect on the
Company, although there can be no assurance.
On October 17, 1994, the Company filed a lawsuit against the former owners
of Advanced Care (New York Supreme Court, Nassau County). The lawsuit alleges,
among other matters, that the former owners knowingly misrepresented the
financial condition of Advanced Care to the Company causing the Company to enter
into the purchase and employment agreements dated May 18, 1994. The Company is
seeking rescission of the employment agreements and monetary damages.
The Company is a party to other litigation arising in the normal course of
its operations. It is the opinion of management of the Company that it has
meritorious defenses against all outstanding claims and that the outcome of such
litigation will not have a significant adverse effect on the Company's financial
position or results of operations. Further, management intends to vigorously
defend all such litigation.
Page 8 of 13
Item. 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's analysis is intended to describe narratively the Company's
consolidated financial condition and its consolidated results of operations. It
should be read in conjunction with the Company's consolidated financial
statements and the accompanying notes.
RESULTS OF OPERATIONS
Net revenues for the three months ended March 31, 1996 decreased to
$9,235,000 as compared to $10,037,000 for the comparable period last year. The
decrease of $802,000 or 8 percent is attributable to the increasing effect of
managed care, specifically in the Company's New York office.
Cost of revenues for the three months ended March 31, 1996 as a percentage
of net revenues was 47 percent as compared to 53 percent for the same period in
1995. The decrease in the cost of revenues as a percentage of net revenues was
primarily attributable to the impact of the Company's durable medical equipment
("DME") business, which has a lower cost of revenues than the nursing and
infusion therapy business. DME sales for the quarter were approximately $1.4
million versus $1.2 million in the comparable quarter last year. For the first
quarter of 1996, the Company's DME operations had a gross profit percentage of
79 percent. Most of the Company's DME business is conducted by Advanced Care
Associates, Inc. and the Company's Houston location.
The Company's selling, general and administrative ("SG&A") costs as a
percentage of net revenues for the three months ended March 31, 1996 increased
to 50 percent as compared to 43 percent for the same period in 1994. This
increase is primarily due to additional write-offs of accounts receivable
classified as bad debt expense within SG&A during 1996. Bad debt expense
increased to $740,000 or 8 percent of net revenues for the three months ended
March 31, 1996 from $297,000 or 3 percent of net revenues for the comparable
period for the prior year.
Net income for the three months ended March 31, 1996 decreased to $61,000
($.01 per share) as compared with $141,000 ($.02 per share) for the same period
in 1995. Net income as a percentage of net revenues for the three months ended
March 31, 1996 was 0.7 percent as compared to 1.4 percent for the same period
last year. The decrease in net income is primarily attributable to the
lower revenues during the three months ended March
31, 1996.
Page 9 of 13 pages
<PAGE>
(Item 2. Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Current assets have decreased to $18,074,000 at March 31, 1996 from
$18,552,000 at December 31, 1995. The net decrease of $478,000 in current assets
is due to the Company's decrease in accounts receivable and marketable
securities offset by an increase in inventories. The decrease in accounts
receivable is primarily attributable to the increase in managed care, which
resulted in the Company's ability to bill and collect negotiated amounts, lower
revenues for the quarter ended March 31, 1996 as compared to the quarter ended
March 31, 1995, offset by a reduction in net allowances, and an increase in
accounts receivable write-offs. The decrease in marketable securities is
primarily attributable to the sale of marketable securities in preparation for
the Company's pending settlement of the Advanced Care litigation. The increase
in inventories is primarily attributable to the start-up of the Houston durable
medical equipment operation.
At March 31, 1996, working capital was $13,717,000 as compared to
$14,455,000 at December 31, 1995. The decrease of $738,000 is primarily
attributable to the decrease in current assets as described above and the
increase in the current portion of long-term debt. The Company has calculated
the current portion of the notes payable associated with the purchase of
Advanced Care in accordance with the original terms of the agreements, offset by
legal costs associated with the litigation, although no payments have been made
on these notes. The Company expects a settlement of this litigation and a
revised note agreement in the second quarter of 1996. See "Part II--Item 1--
Legal Proceedings" and Note 5 to the financial statements.
The Company has a term revolving credit agreement with its bank which
provides for borrowings up to $12,000,000, expiring November 16, 1998. The
Company may borrow up to 70 percent of eligible receivables, as defined pursuant
to the terms of the revolving credit agreement plus the higher of $500,000 or 30
percent of eligible inventory, as defined. Interest is charged at prime (8.25
percent at March 31, 1996) plus one-quarter percent. The outstanding balance
under this arrangement at March 31, 1996 was $6,500,000. At March 31, 1996, the
Company was in default of certain financial convenants specified in the amended
credit agreement with the bank and received a waiver from the bank for these
covenants for the fiscal quarter ended March 31, 1996. The waiver requires,
among other things, the Company to raise additional capital in an equity
offering on or before June 30, 1996.
The average days sales in outstanding receivables increased from 137 days
for the year ended December 31, 1995 to 141 days at March 31, 1996 based upon
net sales and net accounts receivable during the respective quarters. The
increase is primarily the result of decreased sales, specifically in the
Company's New York location. Delays resulting from increased third-party payor
scrutiny of invoices, refusal to pay or an increased proportion of Medicare and
Medicaid patients could, in the future, have a material adverse effect on the
Company's liquidity and general financial condition.
Page 10 of 13
<PAGE>
(Item 2. Continued)
Although management anticipates that income from operations will increase,
cash from operations may decrease because the Company's expanded operations will
require increased investment in accounts receivable and inventories which may
not be offset by increases in accounts payable.
Management believes that available marketable securities and cash generated
from operations and funds available under its revolving credit agreement will be
sufficient for the Company to satisfy the capital requirements associated with
the Company's future growth plans and to finance working capital requirements
for the foreseeable future. The Company also anticipates seeking additional
financing from other sources to continue its expansion.
Inflation has not significantly impacted the Company's financial position
or operations.
Page 11 of 13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the consolidated financial statements contained in this
Report on Form 10-Q and Note 17 and Item 3 - "Legal Proceedings" to the
Company's Report on Form 10-K for the year ended December 31, 1995 with respect
to the legal proceeding involving the Company's subsidiary Advanced Care
Associates, Inc.
ITEM 2. CHANGE IN SECURITIES
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
With respect to the Company's bank loan, see Note 3 to the financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
A. EXHIBITS
3 (i) Certificate of Incorporation of the Company, as amended, filed as an
exhibit to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, which exhibit is incorporated herein by reference.
(ii) Bylaws of Registrant, filed in the Company's Registration Statement on
Form S-18 or post- effective amendments thereto, which exhibit is
incorporated herein by reference (Registration No. 33-27840-NY).
4 (i) Form of specimen stock certificate, filed in the Company's Registration
Statement on Form S-18 or post-effective amendments thereto, which exhibit is
incorporated herein by reference (Registration No. 33-27840-NY).
(ii) Form of Underwriter's Warrant Certificate, filed as an exhibit to the
Company's Registration Statement on Form S-1 or post-effective amendments
thereto, which exhibit is incorporated herein by reference (Registration No.
33-42528).
B. REPORTS ON FORM 8-K
None
PAGE 12 OF 13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Care Group, Inc.
---------------------
(Registrant)
Dated: May 13, 1996
-------------
/s/ Ann T. Mittasch
-------------------
Ann T. Mittasch
President and Chairman
Dated: May 13, 1996
------------
/s/ Pat H. Celli
----------------
Pat H. Celli
Chief Financial Officer
(Principal Financial Officer)
Page 13 of 13 pages
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 561
<SECURITIES> 508
<RECEIVABLES> 18491
<ALLOWANCES> 3564
<INVENTORY> 1763
<CURRENT-ASSETS> 18552
<PP&E> 5416
<DEPRECIATION> 1873
<TOTAL-ASSETS> 37010
<CURRENT-LIABILITIES> 4097
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 23382
<TOTAL-LIABILITY-AND-EQUITY> 37010
<SALES> 39718
<TOTAL-REVENUES> 39718
<CGS> 20165
<TOTAL-COSTS> 20165
<OTHER-EXPENSES> 17421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 688
<INCOME-PRETAX> 1444
<INCOME-TAX> 698
<INCOME-CONTINUING> 746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 746
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
