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 September 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
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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 November 1, 1997 there were 12,511,367 shares of the Registrant's
Common Stock, $.01 par value, outstanding.
1
<PAGE>
Curative Health Services, Inc.
INDEX
Part I Financial Information Page No.
- ------ --------------------- --------
Item 1 Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations 3
Three and Nine Months ended September 30, 1997 and 1996
Condensed Consolidated Balance Sheets 4
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Cash Flows 5
Nine Months ended September 30, 1997 and 1996
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.
- ------- ----------------- --------
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
2
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Part I. Financial Information
- ------- ---------------------
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 Nine Months Ended
Sept 30, Sept 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 22,705 $ 17,462 $ 64,046 $ 48,767
Costs and operating expenses:
Cost of product sales and services 12,421 9,862 35,173 27,221
Selling, general and administrative 5,783 4,702 16,604 14,315
------ ------ ------ ------
Total costs and operating expenses 18,204 14,564 51,777 41,536
------ ------ ------ ------
Income from operations 4,501 2,898 12,269 7,231
Interest income 689 387 1,914 754
------ ------ ------ ------
Income before income taxes 5,190 3,285 14,183 7,985
Income taxes 904 296 2,320 680
------ ------ ------ ------
Net income $ 4,286 $ 2,989 $11,863 $ 7,305
======= ======= ======= =======
Net income per common share and
equivalent shares $ .33 $ .24 $ .92 $ .62
======= ======= ======= =======
Weighted average common shares outstanding 13,010 12,256 12,963 11,754
====== ====== ====== ======
</TABLE>
See accompanying notes
3
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,820 $ 5,226
Marketable securities held-to-maturity 34,854 37,838
Accounts receivable, net 13,565 12,319
Prepaids and other current assets 830 1,022
--- -----
Total current assets 68,069 56,405
Property and equipment, net 7,891 4,754
Other assets 761 800
--- ---
Total assets $ 76,721 $ 61,959
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable $ 9,204 $ 7,368
Accrued liabilities 3,645 3,137
Capital lease obligations 44 140
-- ---
Total current liabilities 12,893 10,645
Long term debt - 1,000
Capital lease obligations 17 44
Stockholders' equity
Common stock 124 121
Additional paid in capital 71,096 69,421
Deficit (7,367) (19,230)
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63,853 50,312
Subscription receivable (42) (42)
--- ---
Total stockholders' equity 63,811 50,270
------ ------
Total liabilities and stockholders'equity $ 76,721 $ 61,959
====== ======
</TABLE>
See accompanying notes
4
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
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1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,863 $ 7,305
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 1,305 750
Changes in operating assets and liabilities 1,290 (2,218)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,458 5,837
INVESTING ACTIVITIES:
Purchases of property and equipment (4,403) (1,265)
Sales (purchases)of marketable securities-net 2,984 (9,760)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (1,419) (11,025)
FINANCING ACTIVITIES:
Proceeds from common stock offering - 22,638
Proceeds from exercise of stock options 1,678 1,098
Principal payments on loans and capital lease obligations (1,123) (135)
----- ----
NET CASH PROVIDED BY FINANCING ACTIVITIES 555 23,601
INCREASE IN CASH AND CASH EQUIVALENTS 13,594 18,413
Cash and cash equivalents at beginning of period 5,226 2,835
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,820 $ 21,248
====== ======
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 11 $ 19
== ==
</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 except when
otherwise indicated in Management's Discussion and Analysis) 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 nine months ended September 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
quarters ended September 30, 1997 and September 30, 1996 of $.01 and $.02 per
share, respectively. For the nine months ended September 30, 1997 and
September 30, 1996 the impact is an increase of $.04 and $.05 per share,
respectively. The impact of Statement No. 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 third quarter of fiscal year 1997
increased 30 percent to $22,705,000, compared to $17,462,000 for the third
quarter of the prior fiscal year. The revenue increase is attributable to the
operation of 141 wound care facilities at the end of the third quarter of 1997
compared to 109 at the end of the third quarter of 1996 and an 11 percent
increase in revenues at existing centers related to higher patient volumes.
Total new patients increased 27 percent from 10,146 in the third quarter of 1996
to 12,867 for the same period in 1997. The total number of new patients
receiving Procuren(R) therapy increased 8 percent from 2,083 in the third
quarter of 1996 to 2,247 in the third quarter of 1997. The percentage of
patients receiving Procuren(R) therapy decreased during the third quarter of
1997 to 18 percent from 21 percent for the same period in 1996. For the first
nine months of 1997 revenues totaled $64,046,000, an increase of 31 percent
compared to $48,767,000 for the same period in 1996. The increased revenue is
attributable to the operation of 141 wound care facilities at the end of the
third quarter 1997 compared to 109 at the end of the third 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 36,511 in the first nine months of 1997 compared to
28,572 in the first nine months of 1996. The total number of new patients
receiving Procuren(R) therapy increased 11 percent to 6,503 in the first nine
months of 1997 from 5,871 in the first nine months of 1996. However, the
percentage of patients receiving Procuren(R) decreased from 21 percent in the
first nine months of 1996 to 18 percent during the first nine 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
third quarter increased from $9,862,000 in 1996 to $12,421,000 in 1997, an
increase of 26 percent, and for the first nine months of 1997 totaled
$35,173,000 compared to $27,221,000 for the same period in 1996. For the third
quarter the increase is attributable to additional staffing and operating
expenses of approximately $1,107,000 associated with the operation of 32
additional wound care facilities at the end of the third quarter of 1997, as
well as increased volume at existing wound care facilities. Additionally, these
32 facilities included eight 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 third quarter of 1996, the higher services components at
these facilities accounted for an additional $545,000 of the increase in product
costs and services for the third quarter of 1997. As a percentage of revenues,
costs of product sales and services for the third quarter of 1997 was 54.7
percent compared to 56.5 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 nine months of 1997, costs of product sales and services
increased 29 percent. The increase is attributed to additional staffing and
operating expenses of approximately $3,349,000 associated with the operation of
32 additional wound care facilities at the end of the third quarter of 1997 as
well as increased volume at existing wound care facilities. Additionally, these
32 facilities included eight 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 nine months of 1996, the higher services components
at these facilities accounted for an additional $2,088,000 of the increase in
product costs and services for the first nine months of 1997. As a percentage of
revenues, costs of product sales and services for the nine months of 1997 was
54.9 percent as compared to 55.8 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 third quarter increased from $4,702,000 in 1996 to $5,783,000
in 1997, an increase of 23 percent, and for the first nine months of 1997
increased to $16,604,000 compared to $14,315,000 for the same period in 1996, an
increase of 16 percent. The increase for both the third quarter and the first
nine months is attributable to the staffing and operating expenses associated
with the growth of the wound care business related to field support departments
particularly clinical operations, management information systems, costs related
to a branding campaign, and a charge in the second quarter of 1997 of $250,000
related to the decision to relocate the Company corporate office in 1998. As a
percentage of revenues, selling, general and administrative expenses were 27
percent in the third quarter of 1996 compared with 25 percent in the third
quarter of 1997, and for the nine months decreased to 26 percent in 1997
compared to 29 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 $2,989,000 or $0.24 per share in the third
quarter of 1996 to $4,286,000 or $0.33 per share in the third quarter of 1997
and for the nine months improved from $7,305,000 or $.62 per share in 1996 to
$11,863,000 or $.92 per share for the first nine months of 1997. The increase in
earnings of $4,558,000 for the nine months ended September 30, 1997 as compared
to September 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 a higher effective tax rate 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 $55.2 million at September
30, 1997 compared to $45.8 million at December 31, 1996. Total cash, cash
equivalents and marketable securities held-to-maturity as of September 30, 1997
was $53.7 million and was invested primarily in highly liquid money market
funds, commercial paper and government securities. The ratio of current assets
to current liabilities was 5.3:1 at December 31, 1996 and September 30, 1997.
The Company's increase in working capital was primarily attributable to the net
income for the nine months.
Cash flows provided by operations for the first nine months of 1997 totaled
$14,458,000 primarily attributable to the net income for the period. Cash flows
used in investing activities totaled $1,419,000 primarily attributable to
capital equipment expenditures offset by maturities of marketable securities.
Cash flows used in financing activities totaled $555,000 primarily attributable
to proceeds from stock option exercises offset by the payment of the loan
guaranteed by the Company for its former subsidiary Curative Technologies, GmbH.
For the first nine months of 1997, the Company experienced a $1,246,000 net
increase in accounts receivable primarily due to the increase in revenues,
although the average number of days receivables were outstanding declined to 54
days as of September 30, 1997 compared to 59 as of December 31, 1996. Further,
the Company's accounts payable and accrued expenses increased $2,344,000 as of
September 30, 1997 compared to December 31, 1996.
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.
8
<PAGE>
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 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 were filed during the quarter ended
September 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: November 13, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,820
<SECURITIES> 34,854
<RECEIVABLES> 13,565
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,069
<PP&E> 14,042
<DEPRECIATION> 6,151
<TOTAL-ASSETS> 76,721
<CURRENT-LIABILITIES> 12,893
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 63,687
<TOTAL-LIABILITY-AND-EQUITY> 76,721
<SALES> 64,046
<TOTAL-REVENUES> 64,046
<CGS> 35,173
<TOTAL-COSTS> 51,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,183
<INCOME-TAX> 2,320
<INCOME-CONTINUING> 11,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,863
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.91
</TABLE>
