UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10Q
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
OR
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 000-19370
Curative Health Services, Inc.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1503914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14 Research Way, Box 9052
East Setauket, NY 11733-9052
(Address of principal executive offices)
Telephone Number (516) 689-7000
- -------------------------------------
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 July 1, 1997 there were 12,384,955 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
Curative Health Services, Inc. and Subsidiaries
1
<PAGE>
INDEX
Part I Financial Information Page No.
- ------------------------------------------------------------------------------
Item 1 Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Three and Six Months ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II Other Information Page No.
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Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
Part I. Financial Information
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Item 1. Condensed Consolidated Financial Statements
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 21,687 $ 16,388 $ 41,341 $ 31,305
Costs and operating expenses:
Cost of product sales and services 11,894 9,024 22,752 17,359
Selling, general and administrative 5,757 4,861 10,821 9,613
------ ----- ------ -----
Total costs and operating expenses 17,651 13,885 33,573 26,972
------ ------ ------ ------
Income from operations 4,036 2,503 7,768 4,333
Interest income 649 184 1,225 367
--- --- ----- ---
Income before income taxes 4,685 2,687 8,993 4,700
Income taxes 773 244 1,416 384
--- --- ----- ---
Net income $ 3,912 $ 2,443 $ 7,577 $ 4,316
===== ===== ===== =====
Net income per common share and $ .30 $ .21 $ .59 $ .38
equivalent shares === === === ===
Weighted average common shares 12,926 11,382 12,935 11,306
outstanding ====== ====== ====== ======
</TABLE>
See accompanying notes
3
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30,1997 December 31, 1996
------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,429 $ 5,226
Marketable securities held-to-maturity 34,195 37,838
Accounts receivable, net 14,187 12,319
Prepaids and other current assets 1,069 1,022
----- -----
Total current assets 61,880 56,405
Property and equipment, net 6,867 4,754
Other assets 774 800
--- ---
Total assets $ 69,521 $ 61,959
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 7,976 $ 7,368
Accrued liabilities 2,650 3,137
Current lease obligations 73 140
-- ---
Total current liabilities 10,699 10,645
Long-term debt - 1,000
Capital lease obligations 24 44
Stockholders' equity
Common stock 123 121
Additional paid in capital 70,370 69,421
Deficit (11,653) (19,230)
------ ------
58,840 50,312
Subscription receivable (42) (42)
-- --
Total stockholders' equity 58,798 50,270
------ ------
Total liabilities and stockholders' $ 69,521 $ 61,959
equity ====== ======
</TABLE>
See accompanying notes
4
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,577 $ 4,316
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 823 403
Changes in operating assets and liabilities (1,794) (1,942)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,606 2,777
INVESTING ACTIVITIES:
Purchase of property and equipment (2,910) (612)
Sales (purchases) of marketable securities - net 3,643 (552)
----- ----
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 733 (1,164)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 951 885
Principal payments on loans and capital lease obligations (1,087) (79)
----- --
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (136) 806
INCREASE IN CASH AND CASH EQUIVALENTS 7,203 2,419
Cash and cash equivalents at beginning of period 5,226 2,835
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,429 $ 5,254
====== =====
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 12 $ 20
== ==
</TABLE>
See accompanying notes
5
<PAGE>
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1996 and
notes thereto contained in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 1997.
Note 2. Income per Common Share
Income per common share is computed by dividing the net income by the
weighted average number of common shares outstanding plus dilutive common
share equivalents. In February 1997, the Financial Accounting Standards Board
issued Statement No.128, Earnings per Share, which is required to be adopted
on December 31,1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the
second quarter ended June 30, 1997 and June 30, 1996 of $.02 per share,
respectively, and for the six months ended June 30, 1997 and June 30, 1996
an increase of $.03 per share, respectively. The impact of Statement 128 on
the calculation of fully diluted earnings per share for these quarters is
not expected to be material.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenues. The Company's revenues for the second quarter of fiscal year 1997
increased 32 percent to $21,687,000, compared to $16,388,000 for the second
quarter of the prior fiscal year. The revenue increase is attributable to the
operation of 131 wound care facilities at the end of the second quarter of 1997
compared to 99 at the end of the second quarter of 1996 and a 12 percent
increase in revenues at existing centers related to higher patient volumes.
Total new patients increased 26 percent from 9,721 in the second quarter of 1996
to 12,271 for the same period in 1997. The total number of new patients
receiving Procuren(R) therapy increased 10 percent from 2,029 in the second
quarter of 1996 to 2,237 in the second quarter of 1997. The percentage of
patients receiving Procuren(R) therapy decreased during the second quarter of
1997 to 18 percent from 21 percent for the same period in 1996. For the first
six months of 1997 revenues totalled $41,341,000, an increase of 32 percent
compared to $31,305,000 for the same period in 1996. The increased revenue is
attributable to the operation of 131 wound care facilities at the end of the
second quarter 1997 compared to 99 at the end of the second quarter of 1996 and
an 11 percent increase in revenues at existing wound care facilities related to
higher patient volumes. Total new patients to the wound care facilities
increased 28 percent to 23,644 in the first six months of 1997 compared to
18,426 in the first six months of 1996. The total number of new patients
receiving Procuren(R) therapy increased 12 percent to 4,256 in the first six
months of 1997 from 3,788 in the first six months of 1996. However, the
percentage of patients receiving Procuren(R) decreased from 21 percent in the
first six months of 1996 to 18 percent during the first six months of 1997. The
Company believes that this decrease is attributable primarily to an increase in
the percentage of less severe chronic wounds being treated at the Company's
Wound Care Centers(R), for which physicians are less likely to prescribe
Procuren(R), as well as a lack of available reimbursement for Medicare patients.
The Company believes that this shift in the severity of the wounds treated at a
Wound Care Center(R) occurs as the local medical community becomes familiar with
the services offered by the Wound Care Center(R) and refers a broader range of
chronic wound patients to the Wound Care Center(R) for treatment. The Company
anticipates that the percentage of patients receiving Procuren(R) will continue
to decline gradually in the future.
Costs of Product Sales and Services. Costs of product sales and services for the
second quarter increased from $9,024,000 in 1996 to $11,894,000 in 1997, an
increase of 32 percent, and for the first six months of 1997 totalled
$22,752,000 compared to $17,359,000 for the same period in 1996. For the second
quarter the increase is attributable to additional staffing and operating
expenses of approximately $1,152,000 associated with the operation of 32
additional wound care facilities at the end of the second quarter of 1997, as
well as increased volume at existing wound care facilities. Additionally, these
32 facilities included three Freestanding Wound Care Centers(R) and seven
additional under-arrangement Wound Care Centers(R) at which the services
component of costs is higher than at the Company's other facilities due to the
additional clinical staffing and expenses that these models require. As compared
with the second quarter of 1996, the higher services components at these
facilities accounted for an additional $829,000 of the increase in product costs
and services for the second quarter of 1997. As a percentage of revenues, costs
of product sales and services for the second quarter of 1997 was 54.8 percent
compared to 55.1 percent for the same period in 1996. The decrease is
attributable to the ability of the Company to leverage the fixed overhead
components of the cost of product sales and services over a growing revenue
base. For the first six months of 1997, costs of product sales and services
increased 31 percent. The increase is attributed to additional staffing and
operating expenses of approximately $2,242,000 associated with the operation of
32 additional wound care facilities at the end of the second quarter of 1997 as
well as increased volume at existing wound care facilities. Additionally these
32 facilities included three Freestanding Wound Care Centers(R) and seven
additional under arrangement Wound Care Centers(R) at which the services
component of costs is higher than at the Company's other facilities due to the
additional staffing and expense that these models require. As compared with the
first six months of 1996, the higher services components at these facilities
accounted for an additional $1,543,000 of the increase in product costs and
services for the first six months of 1997. As a percentage of revenues, costs of
product sales and services for the six months of 1997 was 55.0 percent as
compared to 55.5 percent in the same period in 1996. The decrease is
attributable to the ability of the Company to leverage the overhead components
of the cost of product sales and services over a growing revenue base.
7
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses for the second quarter increased from $4,861,000 in 1996 to $5,757,000
in 1997, an increase of 18 percent, and for the first six months of 1997
increased to $10,821,000 compared to $9,613,000 for the same period in 1996, an
increase of 13 percent. The increase for both the second quarter and the first
six months is attributable to the staffing and operating expenses associated
with the growth of the wound care business particularly related to field support
departments, and a charge of $250,000 related to the decision to relocate the
Company corporate office in the first quarter of 1998. As a percentage of
revenues, selling, general and administrative expenses were 30 percent in the
second quarter of 1996 compared with 27 percent in the second quarter of 1997,
and for the six months decreased to 26 percent in 1997 compared to 31 percent
for the same period in 1996. The decrease is attributable to the ability of the
Company to obtain leverage by spreading the costs of its overhead structure over
a broader revenue base.
Net Income. Net income improved from $2,443,000 or $0.21 per share in the second
quarter of 1996 to $3,912,000 or $0.30 per share in the second quarter of 1997
and for the six months improved from $4,316,000 or $.38 per share in 1996 to
$7,577,000 or $.59 per share for the first six months of 1997. The increase in
earnings of $3,261,000 for the six months ended June 30, 1997 as compared to
June 30, 1996 is primarily attributable to an improvement in operating margins
associated with the revenue growth particularly related to existing wound care
centers and economies of scale achieved from market growth and increased
interest income due to higher cash balances offset by an increase in income
taxes as the result of higher effective taxes in 1997. Effective tax rates are
higher in 1997 due to the anticipated full utilization of net operating loss
carryforwards.
Liquidity and Capital Resources. Working capital was $51.2 million at June 30,
1997 compared to $45.8 million at December 31, 1996. Total cash, cash
equivalents and marketable securities held-to-maturity as of June 30, 1997 was
$46.6 million and was invested primarily in highly liquid money market funds,
commercial paper and government securities. The ratio of current assets to
current liabilities increased from 5.3:1 at December 31, 1996 to 5.8:1 at June
30, 1997. The Company's increase in working capital and improvement in the ratio
of current liabilities was primarily attributable to the net income for the six
months.
Cash flows provided by operations for the first six months of 1997 totalled
$6,606,000 primarily attributable to the net income for the period. Cash flows
used in investing activities totalled $733,000 primarily attributable to
maturities of marketable securities, offset by capital equipment expenditures.
Cash flows provided by financing activities totalled $136,000 primarily
attributable to the payment of the loan guaranteed by the Company for its former
subsidiary Curative Technologies, GmbH, offset by stock option exercises.
For the first six months of 1997, the Company experienced a $1,868,000 net
increase in accounts receivable primarily due to the increase in revenues,
although the average number of days receivables were outstanding declined to 58
days as of June 30, 1997 compared to 59 as of December 31, 1996. Further, the
Company's accounts payable and accrued expenses increased $121,000 as of June
30, 1997 compared to December 31, 1996.
8
<PAGE>
The Company's longer term cash requirements include working capital for the
further expansion of its wound care business. Other cash requirements are
anticipated for capital expenditures in the normal course of business. The
Company expects that based on its current business plan, its existing cash
equivalents and marketable securities will be sufficient to satisfy its current
working capital needs. The effects of inflation and foreign currency translation
risks are considered immaterial.
Cautionary Statements
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. These statements include statements
regarding intent, belief or current expectations of the Company and its
management. These forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in
these statements. Factors that might cause such differences include, but
are not limited to, changes in the Company's level of business with
Columbia/HCA Healthcare Corporation, changes in the government regulations
relating to the Company's wound care operations or Procuren(R),
uncertainties relating to health care reform initiatives, changes in the
availability of third party reimbursements for the Company's product and
services, and the other risks and uncertainties detailed throughout this
report and from time to time in the Company's filings with the Securities and
Exchange Commission.
9
<PAGE>
Curative Health Services, Inc. and Subsidiaries
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1997 annual meeting of stockholders on May 29, 1997.
Proxies for the meeting were solicited pursuant to Section 14 of the
Securities and Exchange Act of 1934, as amended, and there was no
solicitation in opposition to management's nominees as listed in the proxy
statement. There were present at the Annual meeting persons or by proxy
the holder of 9,583,935 votes. At the meeting the stockholders elected all
seven members of the Company's Board of Directors to serve for an
additional term of one year.
Elected member of Board of Directors: (Shares voted affirmative in
parenthesis)
Gerardo Canet (9,550,716) Gerard Moufflet (9,550,591)
Lawrence Hoff (9,550,206) Lawrence J. Steusser (9,549,506)
Timothy I. Maudlin (9,551,006) John Vakoutis (9,550,581)
Daniel A. Gregorie (9,549,790)
The stockholders also ratified the Board's selection of Ernst & Young as
independent auditors for the Company for the fiscal year ended December
31, 1997. Number of votes for were 9,574,597, against 860 and 8,478
abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are filed as part of this report.
(b) No reports on Form 8-K filed were during the quarter ended June 30,
1997.
10
<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.
Dated: August 14, 1997
Curative Health Services, Inc.
(Registrant)
/s/ John Vakoutis
-------------------------------------------
John Vakoutis
President and Chief Executive Officer
/s/ John C. Prior
-------------------------------------------
John C. Prior
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,429
<SECURITIES> 34,195
<RECEIVABLES> 14,187
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 61,880
<PP&E> 12,550
<DEPRECIATION> 5,683
<TOTAL-ASSETS> 69,521
<CURRENT-LIABILITIES> 10,699
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 58,675
<TOTAL-LIABILITY-AND-EQUITY> 69,521
<SALES> 41,341
<TOTAL-REVENUES> 41,341
<CGS> 22,752
<TOTAL-COSTS> 33,573
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,993
<INCOME-TAX> 1,416
<INCOME-CONTINUING> 7,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,577
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
