UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10Q
-----------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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
-------------------------------------
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 May 1, 1999 there were 10,088,510 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
Three Months ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 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 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
Part II Other Information Page No.
- --------------------------------------------------------------------------------
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
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)
Three Months Ended March 31,
1999 1998
---- ----
Revenues $25,243 $24,513
Cost and Expenses:
Cost of product sales and services 14,074 13,245
Selling, general and administrative 5,714 5,671
----- -----
Total costs and operating expenses 19,788 18,916
Income from operations 5,455 5,597
Interest income 645 599
Income before income taxes 6,100 6,196
Income taxes 2,288 2,319
Net income $ 3,812 $ 3,877
===== =====
Net income per common share, basic $ .32 $ .31
=== ===
Net income per common share, diluted $ .31 $ .29
=== ===
Weighted average common shares, basic 11,873 12,601
====== ======
Weighted average common shares, diluted 12,133 13,152
====== ======
3
(See accompanying notes)
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, 1999 December 31, 1998
(Unaudited)
ASSETS
Cash and cash equivalents $ 6,596 $ 24,222
Marketable securities held-to-maturity 33,383 45,830
Accounts receivable, net 19,195 19,871
Deferred tax assets 1,042 1,042
Prepaids and other current assets 1,044 1,179
----- -----
Total current assets 61,260 92,144
Property and equipment, net 13,460 13,366
Other assets 3,568 3,611
----- -----
Total assets $ 78,288 $ 109,121
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 12,459 $ 13,497
Accrued liabilities 912 2,221
Current lease obligations - 7
------ ------
Total current liabilities 13,371 15,725
Stockholders' equity
Common stock 100 127
Additional paid in capital 46,734 79,000
Retained earnings 18,083 14,269
------ ------
Total stockholders' equity 64,917 93,396
------ ------
Total liabilities and stockholders' equity $ 78,288 $ 109,121
====== =======
4
(See accompanying notes)
<PAGE>
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 3,812 $ 3,877
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in operations of investee 85 -
Depreciation and amortization 1,004 700
Changes in operating assets and liabilities (1,590) (1,875)
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,311 2,702
INVESTING ACTIVITIES:
Purchase of property and equipment (1,085) (1,781)
Sales (Purchases) of marketable securities 12,446 (15,981)
------ -------
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES 11,361 (17,762)
FINANCING ACTIVITIES:
Stock repurchases (32,320) -
Proceeds from exercise of stock options 29 1,051
Principal payments on loans and capital lease obligations (7) (10)
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (32,298) 1,041
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,626) (14,019)
Cash and cash equivalents at beginning of period 24,222 39,746
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,596 $ 25,727
===== ======
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 0 $ 2
=== ===
5
(See accompanying notes)
<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, 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 three months ended March 31, 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:
1999 1998
------------------
Weighted average shares, basic 11,873 12,601
Effect of diluted stock options 260 551
--- ---
Weighted average shares, diluted 12,133 13,152
====== ======
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".
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
"whistlerblower" 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.
6
<PAGE>
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" statue 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 been required to furnish
to Medicare auditors each year 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 were named in four shareholder
lawsuits, namely:
Ernest Hack versus Curative Health Services, Inc et al.
Scott Thompson versus Curative Health Services, Inc et al.
Tirdad V. Zarookian versus Curative Health Services, Inc et al.
William Nolan versus Curative Health Services, Inc et al.
7
<PAGE>
All suits were 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. The suits seek to recover unspecified
damages from defendants. The Company denies the allegations and intends to
vigorously defend the suits.
8
<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 first quarter of fiscal year 1999
increased 3 percent to $25,243,000 compared to $24,513,000 for the first quarter
of the prior fiscal year. The revenue increase is attributable to the operation
of 160 wound care centers at the end of the first quarter of 1999 compared to
135 at the end of the first quarter of 1998 and a 2 percent increase in revenues
at existing centers related to higher patient volumes. The Company's revenue
growth declined to 3% in the first quarter of 1999 compared to 25% for the same
quarter in 1998. The decline is primarily attributable to the closing of 17
Wound Care Centers and the modification of contractual terms of certain renewed
contracts. At any time during the year, 10 percent to 15 percent of 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 currently face
financially challenging times. 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 growth. As the result of the recent legal action against the Company,
further unanticipated terminations or non-renewals may take place. Additionally,
new business development may be slower than normal given the legal uncertainties
facing the Company. Any inability of the Company to develop new Wound Care
Centers could further deteriorate 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 10 percent from 13,519 in the first quarter of 1998 to 14,905 for the
same period in 1999. The total number of new patients receiving Procuren(R)
therapy decreased from 2,081 in the first quarter of 1998 to 1,670 in the first
quarter of 1999. The percentage of patients receiving Procuren(R) therapy
decreased during the first quarter of 1999 to 11 percent from 15 percent for the
same period in 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
first quarter increased from $13,245,000 in 1998 to $14,074,000 in 1999, an
increase of 6 percent. The increase is attributable to additional staffing and
operating expenses of approximately $1,137,000 associated with the operation of
25 additional wound care centers at the end of the first quarter of 1999, as
well as increased volume at existing wound care facilities. Additionally, these
25 centers included 17 additional 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 first quarter of 1998, the higher services
components at these centers accounted for an additional $762,000 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 first quarter of 1999 was
56 percent compared to 54 percent for the same period in 1998. The two percent
increase is attributed to the slowing of revenue and existing same store sales
growth which decreased margins and the Company's ability to leverage expenses
over a broader revenue base.
9
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses for the first quarter increased from $5,671,000 in 1998 to $5,714,000
in 1999 an increase of 1 percent. The increase 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 23 percent in the first quarter of 1998
and 1999.
Net Income. Net income was $3,877,000 or $0.29 per share in the first quarter of
1998 compared to $3,812,000 or $0.31 per share in the first quarter of 1999. The
decrease in earnings of $65,000 for the three months ended March 31, 1999 as
compared to March 31, 1998 is attributable to the declining revenue growth which
impacted wound care center margins.
Liquidity and Capital Resources.
Working capital was $47.9 million at March 31, 1999 compared to $76.4 million at
December 31, 1998. Total cash, cash equivalents and marketable securities
held-to-maturity as of March 31, 1999 was $40 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 $40 million at March 31, 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 4.6:1 at March
31, 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 three months of 1999 totaled
$3,311,000 primarily attributable to the net income for the period. Cash flows
used in investing activities totaled $11,361,000 primarily attributable to sales
of marketable securities to fund the stock repurchase. Cash flows used in
financing activities totaled $32,298,000 primarily attributable to the
repurchase of shares.
For the first three months of 1999, the Company experienced a $676,000 net
decrease in accounts receivable and an increase in the average number of days
receivables outstanding to 68 days as of March 31, 1999 compared to 66 as of
December 31, 1998. Further, the Company's accounts payable and accrued expenses
decreased $2,347,000 as of March 31, 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.
10
<PAGE>
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 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.
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 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. Also,
contacts are being made with the Company's major customers. 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.
11
<PAGE>
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 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.
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, 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.
12
<PAGE>
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.
13
<PAGE>
Curative Health Services, Inc. and Subsidiaries
Part II. Other Information
Item 1. 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".
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
"whistlerblower" 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 "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" statue 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 been required to furnish to
Medicare auditors each year 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.
14
<PAGE>
Subsequent to the disclosure of the Justice Department action, the Company and,
in some cases, certain of its officers were named in four shareholder lawsuits,
namely:
Ernest Hack versus Curative Health Services, Inc et al.
Scott Thompson versus Curative Health Services, Inc et al.
Tirdad V. Zarookian versus Curative Health Services, Inc et al.
William Nolan versus Curative Health Services, Inc et al.
All suits were 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. The suits seek to recover unspecified damages from the defendants.
The Company denies the allegations and intends to vigorously defend the suits.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Forms 8-K
Form 8-K dated February 18, 1999, reporting under Item 5 on management's
quarterly telephone conference with analysts and investors.
15
<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: May 17, 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)
16
<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,596
<SECURITIES> 33,383
<RECEIVABLES> 19,195
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 61,260
<PP&E> 24,055
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0
0
<COMMON> 100
<OTHER-SE> 64,817
<TOTAL-LIABILITY-AND-EQUITY> 78,288
<SALES> 25,243
<TOTAL-REVENUES> 25,243
<CGS> 14,074
<TOTAL-COSTS> 19,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,100
<INCOME-TAX> 2,288
<INCOME-CONTINUING> 3,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,812
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
