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, 1998
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)
150 Motor Parkway
Hauppauge, NY 11788-5108
(Address of principal executive offices)
Telephone Number (516) 232-7000
Former Address: 14 Research Way; Box 9052, E.Setauket, NY 11733-9052
-------------------------------------
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, 1998 there were 12,731,935 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
1
<PAGE>
Curative Health Services, Inc. and Subsidiaries
INDEX
Part I Financial Information Page No.
Item 1 Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Six Months ended June 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1998 and 1997 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.
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 5 Exhibits and Reports on Form 8-K 9
Signatures 11
2
<PAGE>
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $26,036 $21,687 $50,549 $41,341
Costs and operating expenses:
Cost of sales and services 14,077 11,894 27,322 22,752
Selling, general and administrative 5,915 5,757 11,586 10,821
----- ----- ------ ------
Total costs and operating expenses 19,992 17,651 38,908 33,573
------ ------ ------ ------
Income from operations 6,044 4,036 11,641 7,768
Interest income 665 649 1,264 1,225
--- --- ----- -----
Income before taxes 6,709 4,685 12,905 8,993
Income taxes 2,513 773 4,832 1,416
----- --- ----- -----
Net income $4,196 $3,912 $8,073 $7,577
====== ====== ====== ======
Net income per common share, basic $.33 $.32 $.64 $.62
==== ==== ==== ====
Net income per common share, diluted $.32 $.30 $.61 $.59
==== ==== ==== ====
Weighted average common shares, basic 12,713 12,349 12,658 12,317
====== ====== ====== ======
Weighted average common shares, diluted 13,078 12,927 13,128 12,935
====== ====== ====== ======
</TABLE>
3
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $28,607 $39,746
Marketable securities held-to-maturity 34,554 18,807
Accounts receivable, net 17,477 14,211
Deferred tax assets 1,235 1,235
Prepaids and other current assets 682 924
--- ---
Total current assets 82,555 74,923
Property and equipment, net 12,398 9,268
Other assets 2,684 748
----- ---
Total assets $97,637 $84,939
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $13,330 $8,846
Accrued liabilities 1,982 3,454
Current portion capital lease obligations 28 40
-- --
Total current liabilities 15,340 12,340
Capital Lease obligation - 7
Stockholders' equity
Common stock 126 125
Additional paid in capital 76,866 75,235
Retained earnings (deficit) 5,305 (2,768)
----- -------
Total stockholders' equity 82,297 72,592
------ ------
Total liabilities and stockholder's equity $97,637 $84,939
======= =======
</TABLE>
4
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
OPERATING ACTIVITIES: 1998 1997
---- ----
<S> <C> <C>
Net income $8,073 $7,577
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,491 823
Changes in operating assets and liabilities 26 (1,794)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,590 6,606
INVESTING ACTIVITIES:
Investment in Accordant Health Services, Inc. (2,000) -
Purchase of property and equipment (4,595) (2,910)
(Purchases) sales of marketable securities (15,747) 3,643
------ -----
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (22,342) 733
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,632 951
Principal payments on loans and capital lease obligations (19) (1,087)
----- -----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,613 (136)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,139) 7,203
Cash and cash equivalents at beginning of period 39,746 5,226
------ -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $28,607 $12,429
======= =======
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid $ 3 $ 12
==== =====
</TABLE>
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,
1997 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, 1998 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 1998.
Note 2. Net Income per Common Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, "Earnings Per Share". FASB 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Net income per common share, basic is computed by dividing the net
income by the weighted average number of common shares outstanding. Net
income per common share, diluted is computed by dividing net income by the
weighted average number of shares outstanding plus dilutive common share
equivalents. All earnings per share amounts for the 1997 period have been
restated to conform to FASB 128 requirements. The following table sets forth
the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares, basic 12,713 12,349 12,658 12,317
basic
Effect of diluted stock options 365 578 470 618
--- --- --- ---
Weighted average shares, diluted 13,078 12,927 13,128 12,935
====== ====== ====== ======
Note 3. Investment in Accordant
On June 4, 1998 the Company signed an agreement with Accordant Health
Services, Inc. in which the Company agreed to invest $4 million in
Accordant preferred stock. This agreement will give the Company an 11
percent interest in Accordant and will be accounted for using the equity
method of accounting, as the Company will have significant influence over
the operations of Accordant. As of June 30, 1998 the Company had invested
$2 million under this agreement.
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 1998
increased 20 percent to $26,036,000, compared to $21,687,000 for the second
quarter of the prior fiscal year. The revenue increase is attributable to the
operation of 159 wound care facilities at the end of the second quarter of 1998
compared to 131 at the end of the second quarter of 1997 and a 10 percent
increase in revenues at existing centers related to higher patient volumes.
Total new patients increased 22 percent from 12,271 in the second quarter of
1997 to 14,996 for the same period in 1998. The total number of new patients
receiving Procuren(R) therapy decreased 3 percent from 2,237 in the second
quarter of 1997 to 2,170 in the second quarter of 1998. The percentage of
patients receiving Procuren(R) therapy decreased during the second quarter of
1998 to 14 percent from 18 percent for the same period in 1997. For the first
six months of 1998 revenues totalled $50,549,000, an increase of 22 percent
compared to $41,341,000 for the same period in 1997. The increased revenue is
attributable to the operation of 159 wound care facilities at the end of the
second quarter of 1998 compared to 131 at the end of the second quarter of 1997
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 21 percent to 28,515 in the first six months of 1998 compared to
23,644 in the first six months of 1997. The total number of new patients
receiving Procuren therapy decreased .1 percent to 4,251 in the first six months
of 1998 from 4,256 in the first six months of 1997. The percentage of patients
receiving Procuren decreased from 18 percent in the first six months of 1997 to
15 percent during the first six months of 1998. 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 $11,894,000 in 1997 to $14,077,000 in 1998, an
increase of 18 percent, and for the first six months of 1998 totalled
$27,322,000 compared to $22,752,000 for the same period in 1997. For the second
quarter the increase is attributable to additional staffing and operating
expenses of approximately $1,344,000 associated with the operation of 28
additional wound care facilities at the end of the second quarter of 1998, as
well as increased volume at existing wound care facilities. Additionally,
these 28 facilities included 17 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 1997, the
higher services components at these facilities accounted for an additional
$942,000 of the increase in product costs and services for the second quarter
of 1998. As a percentage of revenues, costs of product sales and services
for the second quarter of 1998 was 54 percent compared to 55 percent for
the same period in 1997. The one percent improvement is attributed to the
ability of the Company to obtain leverage by spreading the costs of its
overhead over a broader revenue base and the improvement of margins at its
free-standing Wound Care Centers(R) in the second quarter of 1998 as compared
to the same period in 1997. For the first six months of 1998, cost of product
sales and services increased 20 percent. The increase is attributed to
additional staffing and operating expenses of approximately $2,713,000
associated with the operation of 28 additional wound care facilities at the end
of the second quarter of 1998 as well as increased volume at existing
wound care facilities. Additionally these 28 facilities included 17 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
1997, the higher services component at these facilities accounted for an
additional $1,780,000 of the increase in cost of product sales and services for
the first six months of 1998. As a percentage of revenues, costs of product
sales and services for the first six months of 1998 was 54 percent as compared
to 55 percent for the same period in 1997. The decrease is attributable to the
ability of the Company to leverage the overhead components of the costs 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 $5,757,000 in 1997 to $5,915,000
in 1998, and for the first six months of 1998 increased to $11,586,000
compared to $10,821,000 for the same period in 1997. The expense for 1997
includes $250,000 of costs related to the corporate office move. Excluding
these costs, selling, general and administrative expenses for the second quarter
and six months of 1998 increased 7 and 10 percent, respectively. The increase
for both the second quarter and six months is attributable to the staffing and
operating expenses associated with the growth in the wound care business
particularly related to field support departments including clinical
operations and management information systems. As a percentage of revenues,
selling, general and administrative expenses were 27 percent in the second
quarter of 1997 compared with 23 percent in the second quarter of 1998, and
for the six months decreased to 23 percent in 1998 compared to 26 percent in
1997. 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 $3,912,000 or $0.30 per share in the second
quarter of 1997 to $4,196,000 or $0.32 per share in the second quarter of 1998,
and for the six months improved from $7,577,000 or $.59 per share in 1997 to
$8,073,000 or $.61 per share for the first six months of 1998. The increase in
earnings of $496,000 for the six months ended June 30, 1998 as compared to June
30, 1997 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 offset by an increase
in income taxes as the result of higher effective tax rates in 1998. Effective
tax rates are higher in 1998 due to the full utilization of net operating loss
carryforwards in 1997.
Liquidity and Capital Resources. Working capital was $67.2 million at June 30,
1998 compared to $62.6 million at December 31, 1997. Total cash, cash
equivalents and marketable securities held-to-maturity as of June 30, 1998 was
$63.2 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 6.1:1 at December 31, 1997 compared to 5.4:1 at June 30,
1998. The Company's increase in working capital is primarily attributable to the
net income for the first six months of 1998.
Cash flows provided by operations for the first six months of 1998 totalled
$9,590,000 primarily attributable to the net income for the period. Cash flows
used in investing activities totaled $22,342,000 attributable to purchases of
marketable securities, property and equipment, and the Accordant agreement. Cash
flows provided by financing activities totalled $1,613,000 primarily
attributable to proceeds from the exercise of stock options.
8
<PAGE>
For the first six months of 1998, the Company experienced a $3,266,000 net
increase in accounts receivable primarily due to the increase in revenues and an
increase in the average number of days receivables outstanding to 59 days as of
June 30, 1998 compared to 54 as of December 31, 1997. Further, the Company's
accounts payable and accrued expenses increased $3,012,000 as of June 30, 1998
compared to December 31, 1997.
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 and the
acquisition of software, computers and equipment related to the Company's
upgrade of management information systems. 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
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 1998 annual meeting of stockholders on May 28,
1998. Proxies for the meeting were solicited pursuant to Section 14 of the
Securities 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 in person or by proxy the holders of 11,187,972
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 (11,004,000) Gerard Moufflet (11,004,651)
Lawrence Hoff (11,004,531) Lawrence J. Stuesser (11,004,776)
Timothy I. Maudlin (11,002,151) John Vakoutis (11,004,576)
Daniel Gregorie (10,690,370)
The stockholders also approved the following:
(a) An amendment to the Company's 1991 Stock Option Plan which increases
the number of shares of Common Stock available for issuance pursuant to options
granted thereunder from 2,456,695 to 3,156,695. Number of votes for were
9,702,469, against 1,121,787, and 10,561 abstained.
(b) An amendment to the Company's Non-Employee Director Stock Option Plan,
to increase the number of shares of Common Stock available for issuance pursuant
to options granted thereunder from 125,000 to 250,000. Number of votes for were
9,907,708, against 934,131, and 10,932 abstained.
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit 10.7 Amendment No. 4 to Curative Technologies, Inc. 1991 Stock
Option Plan
Exhibit 10.19 Amendment No.1 to Non-Employee Director Stock Option Plan
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998
(i) Form 8-K dated June 4, 1998
The Company issued a press release on June 4, 1998 announcing
that it signed a development and license agreement with Accordant Health
Services, Inc., a private disease management company and agreed to participate
in a round of venture financing in which it will invest $4 million in Accordant
preferred stock.
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 13, 1998
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)
11
<PAGE>
Exhibit 10.7
AMENDMENT NO. 4
TO
CURATIVE TECHNOLOGIES, INC.
1991 STOCK OPTION PLAN
WHEREAS, pursuant to resolutions adopted by the Board of
Directors of Curative Health Services, Inc., (the "Company") at a meeting on
April 13, 1998, the Curative Technologies, Inc. 1991 Stock Option Plan (the
"Option Plan") was amended to increase the number of shares of common stock of
the Company subject to options thereunder to 3,156,695 shares; and
WHEREAS, such amendment to the Option Plan is subject to the
approval of the shareholders of the Company;
NOW, THEREFORE, subject to receipt of such approval of the
shareholders, the third sentence of Section 3 of the Option
Plan is amended and restated in its entirety to read as follows:
Subject to adjustment as provided in Section 12 hereof, the
maximum number of shares with respect to which options may be
granted under this Plan shall be 3,156,695, including options for
shares under the prior Plan outstanding on April 8, 1991, and
shares issuable under other options outstanding on April 8, 1991.
Dated as of April 13, 1998
12
<PAGE>
Exhibit 10.19
AMENDMENT NO. 1
TO
CURATIVE TECHNOLOGIES, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, pursuant to resolutions adopted by the Board of
Directors of Curative Health Services, Inc., (the "Company") at a meeting on
April 13, 1998, the Curative Technologies, Inc. Non-Employee Director Stock
Option Plan (the "Option Plan") was amended to increase the number of shares of
common stock of the Company subject to options thereunder to 250,000 shares; and
WHEREAS, such amendment to the Plan is subject to the
approval of the shareholders of the Company;
NOW, THEREFORE, subject to receipt of such approval of the
shareholders, the third sentence of Section 3 of the Plan
is amended and restated in its entirety to read as follows:
Subject to the provisions of Section 11 of this Plan, the maximum
aggregate number of Shares which may be optioned and sold under
the Plan, excluding those shares constituting the Unexercised
portion of any cancelled, terminated or expired options, is
250,000 Shares. Such Shares shall be authorized, but unissued,
Common Stock. If an Option should expire or become unexercisable
for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the
Plan shall have been terminated, become available for the grant
of other Options under the Plan.
Dated as of April 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 28,607 12,429
<SECURITIES> 34,554 34,195
<RECEIVABLES> 17,477 14,187
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 82,555 61,880
<PP&E> 20,711 12,550
<DEPRECIATION> 8,313 5,683
<TOTAL-ASSETS> 97,637 69,521
<CURRENT-LIABILITIES> 15,340 10,699
<BONDS> 0 0
0 0
0 0
<COMMON> 126 123
<OTHER-SE> 82,171 58,675
<TOTAL-LIABILITY-AND-EQUITY> 97,637 69,521
<SALES> 50,549 41,341
<TOTAL-REVENUES> 50,549 41,341
<CGS> 27,322 22,752
<TOTAL-COSTS> 38,908 33,573
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 12,905 8,993
<INCOME-TAX> 4,832 1,416
<INCOME-CONTINUING> 8,073 7,577
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,073 7,577
<EPS-PRIMARY> 0.64 0.62
<EPS-DILUTED> 0.61 0.59
</TABLE>
