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, 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 November 1, 1998 there were 12,757,120 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
1
<PAGE>
Curative Health Services, Inc. and Subsidiary
INDEX
Part I Financial Information Page No.
Item 1 Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Three and Nine Months ended September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 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 6 Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Curative Health Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues $26,722 $22,705 $77,271 $64,046
Costs and operating expenses:
Cost of sales and services 14,409 12,421 41,731 35,173
Selling, general and administrative 5,944 5,783 17,530 16,604
----- ----- ------ ------
Total costs and operating expenses 20,353 18,204 59,261 51,777
------ ------ ------ ------
Income from operations 6,369 4,501 18,010 12,269
Interest income 687 689 1,951 1,914
--- --- ----- -----
Income before taxes 7,056 5,190 19,961 14,183
Income taxes 2,664 904 7,496 2,320
----- --- ----- -----
Net income $4,392 $4,286 $12,465 $11,863
====== ====== ======= =======
Net income per common share, basic $.34 $.34 $.98 $.96
==== ==== ==== ====
Net income per common share, diluted $.34 $.33 $.95 $.92
==== ==== ==== ====
Weighted average common shares, basic 12,741 12,461 12,686 12,365
====== ====== ====== ======
Weighted average common shares, diluted 13,041 13,010 13,080 12,963
====== ====== ====== ======
3
<PAGE>
Curative Health Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, 1998 December 31, 1997
(Unaudited)
ASSETS
Cash and cash equivalents $14,695 $39,746
Marketable securities held-to-maturity 49,902 18,807
Accounts receivable, net 18,096 14,211
Deferred tax assets 1,235 1,235
Prepaids and other current assets 1,131 924
----- ---
Total current assets 85,059 74,923
Property and equipment, net 12,992 9,268
Other assets 2,695 748
----- ---
Total assets $100,746 $84,939
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $10,880 $8,846
Accrued liabilities 2,929 3,454
Current portion capital lease obligations 17 40
-- --
Total current liabilities 13,826 12,340
Capital lease obligations - 7
Stockholders' equity
Common stock 126 125
Additional paid in capital 77,097 75,235
Retained earnings (deficit) 9,697 (2,768)
----- -------
Total stockholder' equity 86,920 72,592
------ ------
Total liabilities and stockholder's equity $100,746 $84,939
======== =======
4
<PAGE>
Curative Health Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine
Months Ended
September 30,
OPERATING ACTIVITIES: 1998 1997
Net income $12,465 $11,863
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,194 1,305
Changes in operating assets and liabilities (2,560) 1,290
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,099 14,458
INVESTING ACTIVITIES:
Investment in Accordant Health Services, Inc. (2,000) -
Purchase of property and equipment (5,888) (4,403)
(Purchases) sales of marketable securities, net (31,095) 2,984
-------- ------
NET CASH (USED IN) INVESTING ACTIVITES (38,983) (1,419)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,863 1,678
Principal payments on loans and capital lease
obligations (30) (1,123)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,833 555
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25,051) 13,594
Cash and cash equivalents at beginning of period 39,746 5,226
------ -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,695 $18,820
======= =======
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid $ 3 $ 11
==== =====
5
<PAGE>
Curative Health Services, Inc. and Subsidiary
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 nine months ended September 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 Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Weighted average shares, basic 12,741 12,461 12,686 12,365
Effect of diluted stock options 300 549 394 598
--- --- --- ---
Weighted average shares, diluted 13,041 13,010 13,080 12,963
====== ====== ====== ======
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 September 30, 1998 the Company had
invested $ 2 million under this agreement, and has a 5.5 percent interest
in Accordant.
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 1998
increased 18 percent to $26,722,000, compared to $22,705,000 for the third
quarter of the prior fiscal year. The revenue increase is attributable to the
operation of 162 wound care facilities at the end of the third quarter of 1998
compared to 141 at the end of the third quarter of 1997 and a 9 percent increase
in revenues at existing centers related to higher patient volumes. The Company's
revenue growth for the quarter and nine month period ended September 30, 1998
when compared to the same 1997 periods has declined from 30 percent to 18
percent and 31 percent to 21 percent, respectively. The decline is primarily
attributable to the closing of 11 Wound Care Centers over the last four quarters
and the modification of contractual terms of six under arrangement programs
during the 1998 period. At any time during the year 10 percent to 15 percent of
contracts are being renegotiated with the client hospital for a variety of
contractual terms or issues. Historically, some contracts have expired without
renewal and others have been terminated by the Company or the client hospital
for various reasons prior to their scheduled expiration. The terminations or
non-renewal of a material number of management contracts could result in a
continued decline in the Company's revenue growth. The Company has a number of
initiatives to counter the decline of growth in revenue, although there can be
no assurance that the initiatives will be successful. Total new patients
increased 21 percent from 12,867 in the third quarter of 1997 to 15,551 for the
same period in 1998. The total number of new patients receiving Procuren(R)
therapy decreased 9 percent from 2,247 in the third quarter of 1997 to 2,047 in
the third quarter of 1998. The percentage of patients receiving Procuren(R)
therapy decreased during the third quarter of 1998 to 13 percent from 17 percent
for the same period in 1997. For the first nine months of 1998 revenues totaled
$77,271,000, an increase of 21 percent compared to $64,046,000 for the same
period in 1997. The increased revenue is attributable to the operation of 162
wound care facilities at the end of the third quarter of 1998 compared to 141 at
the end of the third quarter of 1997 and a 10 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 44,066 in the
first nine months of 1998 compared to 36,511 in the first nine months of 1997.
The total number of new patients receiving Procuren therapy decreased 3 percent
to 6,298 in the first nine months of 1998 from 6,503 in the first nine months of
1997. The percentage of patients receiving Procuren decreased from 18 percent in
the first nine months of 1997 to 14 percent during the first nine 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.
7
<PAGE>
Costs of Product Sales and Services. Costs of product sales and services for the
third quarter increased from $12,421,000 in 1997 to $14,409,000 in 1998, an
increase of 16 percent, and for the first nine months of 1998 totaled
$41,731,000 compared to $35,173,000 for the same period in 1997. For the third
quarter the increase is attributable to additional staffing and operating
expenses of approximately $1,605,000 associated with the operation of 21
additional wound care facilities at the end of the third quarter of 1998, as
well as increased volume at existing wound care facilities. Additionally, these
21 facilities included 18 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 third quarter of 1997, the higher services
components at these facilities accounted for an additional $1,006,000 of the
increase in product costs and services for the third quarter of 1998. As a
percentage of revenues, costs of product sales and services for the third
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 third quarter of 1998 as compared to the same period in 1997. For the
first nine months of 1998, cost of product sales and services increased 19
percent. The increase is attributed to additional staffing and operating
expenses of approximately $4,318,000 associated with the operation of 21
additional wound care facilities at the end of the third quarter of 1998 as well
as increased volume at existing wound care facilities. Additionally these 21
facilities included 18 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 1997, the higher services component at
these facilities accounted for an additional $2,787,000 of the increase in cost
of product sales and services for the first nine months of 1998. As a percentage
of revenues, costs of product sales and services for the first nine 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.
Selling, General and Administrative. Selling, general and administrative
expenses for the third quarter increased from $5,783,000 in 1997 to $5,944,000
in 1998, and for the first nine months of 1998 increased to $17,530,000 compared
to $16,604,000 for the same period in 1997. The increase for both the third
quarter and nine 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 25 percent in the third quarter of 1997 compared
with 22 percent in the third quarter of 1998, and for the nine 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 $4,286,000 or $0.33 per share in the third
quarter of 1997 to $4,392,000 or $0.34 per share in the third quarter of 1998,
and for the nine months improved from $11,863,000 or $.92 per share in 1997 to
$12,465,000 or $.95 per share for the first nine months of 1998. The increase in
earnings of $602,000 for the nine months ended September 30, 1998 as compared to
September 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.
8
<PAGE>
Liquidity and Capital Resources. Working capital was $71.2 million at September
30, 1998 compared to $62.6 million at December 31, 1997. Total cash, cash
equivalents and marketable securities held-to-maturity as of September 30, 1998
was $64.6 million and was invested primarily in highly liquid money market
funds, commercial paper and government securities. The ratio of current assets
to current liabilities was 6.1:1 at December 31, 1997 compared to 6.2:1 at
September 30, 1998. The Company's increase in working capital is primarily
attributable to the net income for the first nine months of 1998.
Cash flows provided by operations for the first nine months of 1998 totalled
$12,099,000 primarily attributable to the net income for the period. Cash flows
used in investing activities totaled $38,983,000 attributable to purchases of
marketable securities, property and equipment, and the Accordant agreement. Cash
flows provided by financing activities totaled $1,833,000 primarily attributable
to proceeds from the exercise of stock options.
For the first nine months of 1998, the Company experienced a $3,885,000 net
increase in accounts receivable primarily due to the increase in revenues and an
increase in the average number of days receivables outstanding to 61 days as of
September 30, 1998 compared to 54 as of December 31, 1997. Further, the
Company's accounts payable and accrued expenses increased $1,509,000 as of
September 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates. As a
result, in less than two years, computer systems and/or software used by many
companies may need to be upgrade to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. Although the Company's internal systems
as well as its software and applications are designed to be Year 2000 compliant,
there can be no assurance that such systems and software contain all necessary
date code changes.
The Company has completed a review of its material computer applications and
believes it has identified and scheduled necessary corrections for its computer
applications. Corrections are currently being made and are expected to be
substantially implemented by the third quarter of fiscal year 1999. The Company
expects that the total cost associated with these revisions will not be
material. These costs will be primarily incurred during the fiscal year 1999 and
be charged to expense as incurred. The Company believes that by completing its
planned corrections to its computer applications, the year 2000 issue with
respect to the Company's systems can be mitigated. However, if such corrections
cannot be completed on a timely basis, the year 2000 issue could have a material
adverse impact on the Company's business, financial condition and results of
operations. Because of the many uncertainties associated with year 2000
compliance issues, and because the Company's assessment is necessarily based on
information from third party vendors and suppliers, there can be no assurance
that the Company's assessment is correct or as to the materiality or effect of
any failure of such assessment to be correct.
9
<PAGE>
The Company has not performed a review and it is unknown whether computer
applications of contract hospital clients and Medicare and other payors will be
year 2000 compliant. The Company has not determined the extent to which any
disruption in the billing practices of its hospital clients or the payment
practices of Medicare or other payors caused by the year 2000 issues will affect
the Company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the Company. Any such
disruption could have a material adverse effect upon the Company's business,
financial condition and results of operations. The Company has a contingency
plan that includes manual work around and adjusting staffing duties to attempt
to compensate for such disruptions.
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,
termination or non-renewal of management contracts 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K filed during the quarter ended September 30, 1998.
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 16, 1998
Curative Health Services, Inc.
(Registrant)
John Vakoutis
President and Chief Executive Officer
John C. Prior
Chief Financial Officer
(Principal Financial and Accounting Officer)
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 16, 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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 14,695 18,820
<SECURITIES> 49,902 34,854
<RECEIVABLES> 18,096 13,565
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 85,059 68,069
<PP&E> 22,004 14,042
<DEPRECIATION> 9,012 6,151
<TOTAL-ASSETS> 100,746 76,721
<CURRENT-LIABILITIES> 13,826 12,893
<BONDS> 0 0
0 0
0 0
<COMMON> 126 124
<OTHER-SE> 77,097 63,687
<TOTAL-LIABILITY-AND-EQUITY> 100,746 76,721
<SALES> 77,271 64,046
<TOTAL-REVENUES> 77,271 64,046
<CGS> 41,731 35,173
<TOTAL-COSTS> 59,261 51,777
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 19,961 14,183
<INCOME-TAX> 7,496 2,320
<INCOME-CONTINUING> 12,465 11,863
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,465 11,863
<EPS-PRIMARY> 0.98 0.96
<EPS-DILUTED> 0.95 0.92
</TABLE>
