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, 1999
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
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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 August 1, 1999 there were 10,090,110 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
1
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Curative Health Services, Inc. and Subsidiaries
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, 1999 and 1998 3
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
Part II Other Information Page No.
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Item 1 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Exhibits and Reports on Form 8-K 13
Signatures 14
2
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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)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------------
Revenues $25,620 $26,036 $50,863 $50,549
Costs and operating expenses:
Cost of sales and services 15,489 14,077 29,563 27,322
Selling, general and administrative 6,788 5,915 12,502 11,586
----- ----- ------ ------
Total costs and operating expenses 22,277 19,992 42,065 38,908
------ ------ ------ ------
Income from operations 3,343 6,044 8,798 11,641
Interest income 390 665 1,035 1,264
--- --- ----- -----
Income before taxes 3,733 6,709 9,833 12,905
Income taxes 1,414 2,513 3,702 4,832
----- ----- ----- -----
Net income $2,319 $4,196 $6,131 $8,073
====== ====== ====== ======
Net income per common share, basic $.23 $.33 $.56 $.64
==== ==== ==== ====
Net income per common share, diluted $.23 $.32 $.55 $.61
==== ==== ==== ====
Weighted average common shares, basic 10,089 12,713 10,979 12,658
====== ====== ====== ======
Weighted average common shares, diluted 10,130 13,078 11,220 13,128
====== ====== ====== ======
See accompanying notes
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Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1999 December 31, 1998
(Unaudited)
ASSETS
Cash and cash equivalents $ 10,228 $ 24,222
Marketable securities held-to-maturity 28,651 45,830
Accounts receivable, net 19,682 19,871
Deferred tax assets 1,042 1,042
Prepaids and other current assets 1,309 1,179
------ ------
Total current assets 60,912 92,144
Property and equipment, net 13,128 13,366
Other assets 4,456 3,611
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Total assets $ 78,496 $109,121
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 9,596 $ 13,497
Accrued liabilities 1,660 2,221
Current portion capital lease obligations - 7
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Total current liabilities 11,256 15,725
Stockholders' equity
Common stock 100 127
Additional paid in capital 46,740 79,000
Retained earnings 20,400 14,269
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Total stockholders' equity 67,240 93,396
------- -------
Total liabilities and stockholder's equity $ 78,496 $109,121
======== ========
See accompanying notes
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Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 6,131 $ 8,073
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in operations of investee 178 -
Depreciation and amortization 2,052 1,491
Changes in operating assets and liabilities (4,451) 26
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,910 9,590
INVESTING ACTIVITIES:
Investment in Accordant Health Services, Inc. (1,000) (2,000)
Purchase of property and equipment (1,788) (4,595)
Sales (Purchases) of marketable securities 17,178 (15,747)
------ ------
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES 14,390 (22,342)
FINANCING ACTIVITIES:
Stock repurchases (32,320) -
Proceeds from exercise of stock options 33 1,632
Principal payments on loans and capital lease obligations (7) (19)
------ ------
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (32,294) 1,613
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,994) (11,139)
Cash and cash equivalents at beginning of period 24,222 39,746
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,228 $ 28,607
====== ======
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 0 $ 3
= =
See accompanying notes
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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, 1998 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, 1999 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 1999.
Note 2. Net Income per Common 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.
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average shares, basic 10,089 12,713 10,979 12,658
Effect of diluted stock options 41 365 241 470
--- --- --- ---
Weighted average shares, diluted 10,130 13,078 11,220 13,128
====== ====== ====== ======
Note 3. Legal Proceedings
On April 7, 1999 the Company announced that it had received a document
subpoena from the Office of Inspector General of the U.S. Department of
Health and Human Services, Region II (New York, NY). The subpoena directs the
Company to produce a broad range of documents from January 1, 1993 to the
present relating to various areas including, among others, the Wound Care
Centers, wound care treatment programs and general business practices. The
subpoena states that it has been delivered in connection with a "Health Care
Investigation". The Company is complying with the subpoena and is furnishing
the requested documents.
6
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On April 12, 1999 the Company announced that a press release from the United
States Department of Justice was released on Friday, April 9, 1999, alleging
that the Company made improper charges to Columbia/HCA hospitals as well as
other hospitals. The Company has obtained a copy of the complaint filed by a
"whistleblower" relator under the Federal civil False Claims Act. The case
has been filed as United States ex rel. Joseph "Mickey" Parslow v.
Columbia/HCA Healthcare Corporation and Curative Health Services, Inc., and
has been assigned civil case number 98-1260-civ-T-23F, in the Federal
District Court for the Middle District of Florida, Tampa Division. The
Company originally anticipated that the Department of Justice would file an
amended complaint by August 6, 1999. Recently, the Department of Justice
contacted the Company, through its outside legal counsel, seeking an
extension beyond August 6, 1999. The Company has agreed to an extension and
anticipates receiving an amended complaint within the next few months.
The "whistleblower's" complaint alleges that: the Company's charges were
excessive; the Company shifted costs from non-allowable services to allowable
services; included charges for advertising costs that were not allowable to
the hospital claiming reimbursement from the Medicare program; and violated
the "anti-kickback" statute because a portion of the Company's fee was based
on the number of new patients seen in the Wound Care Centers managed by the
Company. The Company disagrees with these characterizations of its
contractual arrangements, its services, and the fees it charges for those
services.
The Company does not believe that it "refers, recommends or arranges" for a
hospital's services in exchange for kickbacks. The Company also believes that
its charges are fair market value for the services that it furnishes, as
supported by the fact that more than 170 hospitals have entered into
contracts with the Company for its services in managing Wound Care Centers.
The Company's charges cover not only direct costs for management services but
also the Company's intellectual property, which includes a unique data base
and clinical pathways that have proven effective in healing intractable
wounds in more than 80 percent of the patients that have completed treatment.
These are patients who otherwise would likely have had to have amputations or
other invasive, expensive, and possibly disabling or disfiguring services.
The Company has expended millions of dollars in developing and maintaining
its clinical pathways, and also in training physicians and other clinicians
in its clinical pathways.
The Company notes that the contracts challenged in the "whistleblower's"
civil suit are contracts that its hospital customers have generally been
required to furnish to Medicare auditors as part of annual cost report
filings. In hundreds of instances, the Company's fees to its hospital
customers have been allowed in full, sometimes after a detailed audit. The
Company, itself, is neither a provider nor a supplier participating in the
Medicare program and does not receive payments from the Medicare program.
The Company has a formal compliance program and management believes that the
Company is in material compliance with applicable laws and ethical business
practices. In the conduct of its business, the Company has relied on the
advice and guidance of nationally recognized law firms in structuring its
business relationships with its hospitals. In this pending litigation, the
Company intends to defend itself vigorously.
Subsequent to the disclosure of the Justice Department action, the Company
and, in some cases, certain of its officers and directors were named in four
shareholder lawsuits filed in the United States District Court for the
Eastern District of New York. The lawsuits allege generally that the Company
and its officers violated federal securities laws by disseminating materially
false and misleading statements and failing to disclose material information
relating to the contractual relationships with Columbia/HCA Healthcare
Corporation and other hospitals, and certain purported misrepresentations in
connection therewith. The suits seek to recover unspecified damages from
defendants. The Company denies the allegations and intends to vigorously
defend the suits.
7
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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 1999
decreased 1.6 percent to $25,620,000 compared to $26,036,000 for the second
quarter of the prior fiscal year. During the second quarter of 1999 the Company
opened 10 new Wound Care Centers and had contract terminations at 10 existing
Wound Care Centers. The 10 contract terminations included 6 Columbia/HCA
Healthcare Corporation Wound Care Centers. Additionally, one contract terminated
prior to opening. The Company signed contracts for 3 new Wound Care Centers and
ended the second quarter 1999 with 5 Wound Care Centers contracted to open. The
Company operated 160 hospital based Wound Care Centers at the end of the second
quarter 1999 compared to 144 at the end of the second quarter 1998. The revenue
decrease for the second quarter 1999 is attributable to the renegotiation of
several existing contracts which resulted in reduced revenues to the Company,
including 24 with Columbia/HCA Healthcare Corporation, contract terminations,
and a reduction in Procuren revenues as the result of a decline in Procuren
patients. At any time during the year, 10 percent to 15 percent of the Company's
contracts are being re-negotiated 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. Hospitals are currently
facing financial challenges associated with lower occupancy rates and reduced
revenue streams due to pricing pressures from third party payors. Program
terminations by client hospitals have been effected for such reasons as
financial restructuring, layoffs, bankruptcies or even hospital closings. The
termination or non-renewal of a material number of management contracts could
result in a continued decline in the Company's revenue. As the result of the
recent legal action against the Company, further unanticipated terminations or
non-renewals may take place. Additionally, new business development has been
slower than normal given the legal uncertainties facing the Company. Any
inability of the Company to develop new Wound Care Centers could further the
revenue decline. The Company has a number of initiatives to counter the decline
in revenue, although there can be no assurance that the initiatives will be
successful. Total new patients increased 4 percent from 14,996 in the second
quarter of 1998 to 15,576 for the same period in 1999. The total number of new
patients receiving Procuren(R) therapy decreased from 2,170 in the second
quarter of 1998 to 1,636 in the second quarter of 1999. The percentage of
patients receiving Procuren(R) therapy decreased during the second quarter of
1999 to 10.5 percent from 14.5 percent for the same period in 1998. For the
first six months of 1999 revenues totalled $50,863,000 compared to $50,549,000
for the same period in 1998 representing flat year over year growth. The lack of
growth in revenues for the six months ended June 30, 1999 is attributable to the
renegotiations of contracts, contract terminations and a reduction in Procuren
revenues as the result of a decline in Procuren patients. During the six months
ended June 30, 1999 the Company opened 20 new Wound Care Centers and had
contract terminations at 14 existing Wound Care Centers. The 14 contract
terminations included 8 Columbia/HCA Wound Care Centers. Additionally one
contract terminated prior to opening. The Company signed contracts for 8 new
Wound Care Centers for the six months ended June 30, 1999. Total new patients to
the wound care facilities for the first six months of 1999, were 30,481 compared
to 28,515 for the same period in 1998, an increase of 6.9 percent. The total
number of new patients receiving Procuren therapy decreased 22 percent to 3,306
in the first six months of 1999 from 4,251 in the first six months of 1998. The
Company believes that this decrease is attributable 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),
a lack of available reimbursement for Medicare patients, the inability of
hospitals to assume collection risks due to financial constraints and increased
competition from other wound healing products. The Company anticipates that the
percentage of patients receiving Procuren(R) will continue to decline gradually
in the future.
8
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Costs of Product Sales and Services. Costs of product sales and services for the
second quarter increased from $14,077,000 in 1998 to $15,489,000 in 1999, an
increase of 10 percent and for the first six months of 1999 totalled $29,563,000
compared to $27,322,000 for the same period in 1998. For the second quarter 1999
the increase is attributable to additional staffing and operating expenses of
approximately $1,116,000 associated with the operation of 16 additional Wound
Care Centers at the end of the quarter, offset by $843,000 associated with
closed centers. Additionally, these 16 Wound Care Centers include 15
under-arrangement Wound Care Centers(R) at which the services component of costs
is higher than at the Company's other centers due to the additional clinical
staffing and expenses that these models require. As compared with the second
quarter of 1998, the higher services components at these centers along with
existing under arrangement centers accounted for $1,007,000 of the increase in
product costs and services for the first quarter of 1999. As a percentage of
revenues, costs of product sales and services for the second quarter of 1999 was
60 percent compared to 54 percent for the same period in 1998. The six percent
increase is attributed to the lower revenue and negative same store sales growth
which decreased margins and created an inability to leverage expenses over a
broader revenue base. For the first six months of 1999, cost of product sales
and services increased 8 percent. The increase is attributable to additional
staffing and operating expenses of approximately $2,253,000 associated with the
operation of 16 additional Wound Care Centers at the end of the second quarter
1999, offset by $1,684,000 associated with closed centers. Additionally, these
16 Wound Care Centers include 15 under arrangement Wound Care Centers at which
the services component of costs is higher than at the Company's other centers
due to the additional clinical staffing and expenses that these models require.
As compared with the first six months of 1998, the higher services components at
these centers along with existing under arrangement centers accounted for
$1,881,000 of the increase in product costs and services for the first six
months of 1999.
Selling, General and Administrative. Selling, general and administrative
expenses for the second quarter increased from $5,915,000 in 1998 to $6,788,000
in 1999, an increase of 15 percent and for the first six months of 1999
increased 8 percent to $12,502,000 compared to $11,586,000 for the same period
in 1998. The increases for both the second quarter and six months are
attributable to legal and other costs of approximately $750,000 related to the
Department of Justice action, the Office of Inspector General's document
subpoena and shareholder class action lawsuits. The Company expects to continue
to incur significant legal and other related costs until the aforementioned
actions are resolved. As a percentage of revenues, selling, general and
administrative expenses were 26 percent in the second quarter of 1999 compared
to 23 percent in the second quarter of 1998 and for the six months were 25
percent compared to 23 percent for the same period in 1998.
Net Income. Net income was $2,319,000 or $0.23 per share in the second quarter
of 1999 compared to $4,196,000 or $0.32 per share in the second quarter of 1998,
and for the first six months of 1999 net income was $.55 per share compared to
$.61 per share for the same period in 1998. The decrease in earnings for the
second quarter and first six months of 1999 is attributable to a reduced revenue
base which impacted wound care center margins and the additional unanticipated
legal and other costs.
9
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Liquidity and Capital Resources.
Working capital was $49.7 million at June 30, 1999 compared to $76.4 million at
December 31, 1998. Total cash, cash equivalents and marketable securities
held-to-maturity as of June 30, 1999 was $39 million and was invested primarily
in highly liquid money market funds, commercial paper and government securities.
The Company's cash and cash equivalents declined from $70 million at December
31, 1998 to $39 million at June 30, 1999. The decline is primarily attributable
to the use of $32 million for the repurchase of 2.7 million shares of the
Company's common stock during the first quarter of 1999. The ratio of current
assets to current liabilities was 5.9:1 at December 31, 1998 and 5.4:1 at June
30, 1999. The Company's decrease in working capital and current ratio is
primarily attributable to the stock repurchase.
Cash flows provided by operations for the first six months of 1999 totaled
$3,910,000 primarily attributable to the net income for the period. Cash flows
provided by investing activities totaled $14,390,000 primarily attributable to
sales of marketable securities to fund the stock repurchase. Cash flows used in
financing activities totaled $32,294,000 primarily attributable to the
repurchase of shares.
For the first six months of 1999, the Company experienced a $189,000 net
decrease in accounts receivable and an increase in the average number of days
receivables outstanding to 68 days as of June 30, 1999 compared to 66 as of
December 31, 1998, due to financial and cash flow constraints being experienced
at some hospitals. Further, the Company's accounts payable and accrued expenses
decreased $4,462,000 as of June 30, 1999 compared to December 31, 1998.
The Company's longer term cash requirements include working capital for the
expansion of its wound care business. Other cash requirements are anticipated
for capital expenditures in the normal course of business, the acquisition of
software, computers and equipment related to the Company's upgrade of management
information systems, and the repurchase of Company stock. Additionally the
Company expects to incur significant legal costs related to the Department of
Justice action and shareholder class action lawsuits filed against the Company
during April 1999 (See Legal Proceedings, Part II Item 1). The Company expects
that based on its current business plan, its existing cash, 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 are coded to accept only
two-digit entries in the date code fields. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities.) As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner, could affect the Company and the U.S.
and world economy generally.
The Company has formed a project team (consisting of representatives from its
information technology, finance, manufacturing, sales, marketing and legal
departments) to address other internal and external Year 2000 issues. The
Company's internal financial, manufacturing and other computer systems are being
reviewed to assess and remediate Year 2000 problems. The Company's assessment of
internal systems includes its information technology ("IT") as well as non-IT
systems (which systems contain embedded technology in manufacturing or process
control equipment containing microprocessors or other similar circuitry). The
Company's Year 2000 compliance program includes the following phases:
identifying systems that need to be modified or replaced; carrying out
remediation work to modify existing systems or convert to new systems; and
conducting validation testing of systems and applications to ensure compliance.
For its significant IT and non IT systems the Company is currently in the
remediation phase of this program.
10
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The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. During 1997 and 1998 the Company was implementing a
management information technology plan which included developing and acquiring
new software as well as acquiring and replacing hardware. The cost of this
management information technology plan was approximately $7 million. Since the
Company has replaced a significant portion of its financial and operational
systems in the last few years, management believes that the new equipment and
software substantially addresses Year 2000 issues. However, the Company will be
required to modify some of its existing hardware and software in order for its
computer systems to function properly in the Year 2000 and thereafter. The
Company estimates that it will complete its Year 2000 compliance program for all
of its significant internal systems no later than the end of the third quarter
of fiscal year 1999.
In addition, the Company is requesting assurances from its major suppliers that
they are addressing the Year 2000 issue and that products purchased by the
Company from such suppliers will function properly in the year 2000. The Company
has made inquiry and continues to follow up with its hospital customers to
assess Year 2000 compliance. These actions are intended to help mitigate the
possible external impact of the Year 2000 problem. However, it is impossible to
fully assess the potential consequences in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
The Company has no way of assuring and it is unknown whether computer
applications of contract hospital clients, 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 to the hospital clients caused by the year
2000 issues will affect the Company's operations. However, any such disruption
in the billing or reimbursement process could have substantial adverse impact on
Medicare or Medicaid payments to the hospitals 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 expects the total cost associated with resolving the Company's
internal Year 2000 issues will not be material including replacing non-complaint
internal systems. The Company's estimates of Year 2000 costs are based on
numerous assumptions, and there can be no assurance that the estimates are
correct or that actual costs will not be materially greater than anticipated.
Based on its assessments to date, the Company believes it will not experience
any material disruption as a result of Year 2000 problems in internal
manufacturing processes, information processing or interface with major
customers, or with processing orders and billing. However, if certain critical
third-party providers, such as those providers supplying electricity, water or
telephone service, experience difficulties resulting in disruption of service to
the Company, a shutdown of the Company's operations at individual facilities
could occur for the duration of the disruption. The Company has not yet
developed a contingency plan to provide for continuity of processing in such
event of various problem scenarios, but it will assess the need to develop such
a plan based on the outcome of its validation phase of its Year 2000 compliance
program and the results of surveying its major suppliers and customers. Assuming
no major disruption in service from utility companies or other critical
third-party providers, the Company believes that it will be able to manage its
total Year 2000 transition without any material effect on the Company's results
of operations or financial condition.
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 end of the third quarter of the 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.
11
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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,
terminations or non-renewal of a material number of contracts or inability to
obtain new 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, uncertainties relating to
the U. S. Department of Justice action and related shareholder class action
lawsuits filed in April 1999 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolios. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines. The Company does not expect any material
loss with respect to its investment portfolio or exposure to market risks
associated with interest rates.
12
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Curative Health Services, Inc. and Subsidiaries
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings
In Item 1 of Part II of its Form 10-Q for the quarter ended March 31,
1999, the Company announced that a press release from the United States
Department of Justice was released alleging that the Company made improper
charges to Columbia/HCA hospitals as well as other hospitals and the filing
of a complaint against the Company entitled United States ex rel. Joseph
"Mickey" Parslow v.Columbia/HCA Healthcare Corporation and Curative Health
Services, Inc. The Company originally anticipated that the Department of
Justice would file an amended complaint by August 6, 1999. Recently, the
Department of Justice contacted the Company, through its outside legal
counsel,seeking an extension beyond August 6, 1999. The Company has agreed
to an extension and anticipates receiving an amended complaint within the
next few months.
Subsequent to the disclosure of the Justice Department action, the
Company and, in some cases, certain officers and directors were named in
four class action shareholder lawsuits alleging violation of the Company's
disclosure obligations based on the failure to disclose certain "facts"
underlying the allegations in the Parslow complaint, and certain purported
misrepresentations in connection therewith. The four lawsuits will be
consolidated into one complaint. There have been no further material
developments on these matters. For further information, see the Company's
Form 10-Q for the quarter ended March 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1999 annual meeting of stockholders on May 26,
1999. 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 9,053,163 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 (8,956,516) Gerard Moufflet (8,598,029)
Lawrence Hoff (8,957,729) Lawrence J. Stuesser (8,957,729)
Timothy Maudlin (8,958,229) John Vakoutis (8,957,976)
Daniel Gregorie (8,957,529)
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999
(i) Form 8-K
Form 8-K dated April 29, 1999, reporting under Item 5 that the
Company and certain of its officers have been named in class actions lawsuits
alleging securities fraud claims under the Securities Exchange Act of 1934.
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.
Dated: August 16, 1999
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)
<PAGE>
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