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 March 31, 2000
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 (631) 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 April 30, 2000 there were 8,874,410 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 Months ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2000 and 1999 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
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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)
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1999 2000
----------------------------
<S> <C> <C>
Revenues $ 22,200 $ 25,243
Cost and Expenses:
Cost of product sales and services 13,984 14,074
Selling, general and administrative 6,535 5,714
----- -----
Total costs and operating expenses 20,519 19,788
------ ------
Income from operations 1,681 5,455
Interest income 624 645
Income before income taxes 2,305 6,100
Income taxes 916 2,288
--- -----
Net income $ 1,389 $ 3,812
===== =====
Net income per common share, basic $ .14 $ .32
=== ===
Net income per common share, diluted $ .14 $ .31
=== ===
Weighted average common shares, basic 10,011 11,873
====== ======
Weighted average common shares, diluted 10,108 12,133
====== ======
</TABLE>
3
<PAGE>
Curative Health Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited)
-----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,151 $ 16,215
Marketable securities held-to-maturity 28,777 30,807
Accounts receivable, net 17,939 20,653
Deferred tax assets 2,271 2,271
Prepaids and other current assets 1,636 1,820
----- -----
Total current assets 67,774 71,766
Property and equipment, net 11,211 12,010
Other assets 5,320 4,134
----- -----
Total assets $ 84,305 $ 87,910
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 6,570 $ 7,831
Accrued expenses 8,049 8,479
----- -----
Total current liabilities 14,619 16,310
Stockholders' equity
Common stock 93 100
Additional paid in capital 43,473 46,769
Retained earnings 26,120 24,731
------ ------
Total stockholders' equity 69,686 71,600
------ ------
Total liabilities and stockholders' equity $ 84,305 $ 87,910
====== ======
</TABLE>
4
<PAGE>
Curative Health Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,389 $ 3,812
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in operations of investee 97 85
Depreciation and amortization 1,212 1,004
Changes in operating assets and liabilities 1,236 (1,590)
----- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,934 3,311
INVESTING ACTIVITIES:
Purchase of property and equipment (308) (1,085)
Sales of marketable securities 2,030 12,446
----- ------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,722 11,361
FINANCING ACTIVITIES:
Stock repurchases (4,756) (32,320)
Proceeds from exercise of stock options 36 29
Principal payments on loans and capital lease obligations - (7)
----- ------
NET CASH USED IN FINANCING ACTIVITIES (4,720) (32,298)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 936 (17,626)
Cash and cash equivalents at beginning of period 16,215 24,222
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,151 $ 6,596
====== =====
</TABLE>
SUPPLEMENTAL INFORMATION PERTAINING TO NONCASH
INVESTING AND FINANCING ACTIVITIES:
In March 2000, the Company recorded an increase of $1,417,000 to its investment
in Accordant Health Services, Inc. and a corresponding increase to paid in
capital related to an increase in the value of the Company's equity interest in
Accordant.
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,
1999 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, 2000 are not necessarily indicative of
the results to be expected for the entire fiscal year ending December 31,
2000.
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:
2000 1999
------------------
Weighted average shares, basic 10,011 11,873
Effect of diluted stock options 97 260
-- ---
Weighted average shares, diluted 10,108 12,133
====== ======
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 first quarter of fiscal year 2000
decreased 12 percent to $22,200,000 compared to $25,243,000 for the first
quarter of the prior fiscal year. The revenue decrease is attributable to the
termination of 22 hospital based programs during the last 12 months,
renegotiation of contract terms at approximately 80 programs, and reduced
Procuren sales. The reduction in revenue was partially offset by the opening of
15 new programs over the last 12 months. The Company ended the first quarter of
2000 with 153 hospital based Wound Care Centers operating compared to 160 at the
end of the first quarter 1999. Revenues at existing centers declined 7 percent
in the first quarter of 2000 as compared to the same period in 1999, primarily
due to such contract renegotiations and declining Procuren revenues. The Company
anticipates that as a result of the July 2000 implementation by the Health Care
Financing Administration (HCFA) of the Outpatient Prospective Payment System
(OPPS) for hospitals and new provider based designation guidelines,
reimbursement rates to hospitals will be insufficient resulting in reduced
revenues to the hospitals. The Company expects that it will need to modify its
management contracts with many of its hospital customers which could result in
reduced revenue to the Company or even contract terminations. As hospitals are
currently facing financial challenges associated with lower occupancy rates and
reduced revenue streams due to pricing pressures from Medicare and third party
payors, there can be no assurance that the Company's renegotiation efforts will
be successful. 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 actions 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 and the pending OPPS implementation. Any inability of the Company to
develop new Wound Care Centers could further reduce revenue. 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 5 percent from 14,905 in the first quarter of 1999 to 15,636 for the
same period in 2000. The total number of new patients receiving Procuren(R)
therapy decreased from 1,670 in the first quarter of 1999 to 1,018 in the first
quarter of 2000. The percentage of patients receiving Procuren(R) therapy
decreased during the first quarter of 2000 to 7 percent from 11 percent for the
same period in 1999. 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.
7
<PAGE>
Costs of Product Sales and Services. Costs of product sales and services for the
first quarter decreased from $14,074,000 in 1999 to $13,984,000 in 1999, a
decrease of 1 percent. The decrease is attributable to reduced staffing and
operating expenses of approximately $342,000 related to the operation of 153
programs at the end of the first quarter 2000 compared with 160 programs
operating at the end of the first quarter 1999, as well as reduced expenditures
of approximately $268,000 related to Procuren production. The reduction in cost
of sales was partially offset by an increase of approximately $430,000 related
to increased patient volume at 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 a percentage of revenues, costs of product sales and services for the first
quarter of 2000 was 63 percent compared to 56 percent for the same period in
1999. The 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.
Selling, General and Administrative. Selling, general and administrative
expenses for the first quarter increased from $5,714,000 in 1999 to $6,535,000
in 2000 an increase of 14 percent. The increase is primarily attributable to
legal and other costs of approximately $500,000 related to the Department of
Justice action, the Office of Inspector General's document subpoena and
shareholder class action lawsuits and approximately $200,000 of consulting and
related costs associated with preparing for OPPS implementation. As a percentage
of revenues, selling, general and administrative expenses were 29 percent in the
first quarter of 2000 compared to 23 percent for 1999. The increase is due to
the higher legal expense and decreased revenue in 2000.
Net Income. Net income was $1,389,000 or $0.14 per diluted share in the first
quarter of 2000 compared to $3,812,000 or $0.31 per diluted share in the first
quarter of 1999. The decrease in earnings of $2,423,000 for the three months
ended March 31, 2000 as compared to March 31, 1999 is attributable to a reduced
revenue base which impacted wound care center margins and the additional legal
and consulting expenses.
Liquidity and Capital Resources.
Working capital was $53.2 million at March 31, 2000 compared to $55.5 million at
December 31, 1999. Total cash, cash equivalents and marketable securities
held-to-maturity as of March 31, 2000 was $45.9 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 $47 million at
December 31,1999 to $45.9 million at March 31, 2000. The decline is primarily
attributable to the use of $4.8 million for the repurchase of 727,000 shares of
the Company's common stock during the first quarter of 2000, offset by cash
flows from operations. The ratio of current assets to current liabilities was
4.4:1 at December 31, 1999 and 4.6:1 at March 31, 2000.
Cash flows provided by operations for the first three months of 2000 totaled
$3,934,000 primarily attributable to the net income for the period and the
reduction in accounts receivable. Cash flows providing by investing activities
totaled $1,722,000 primarily attributable to sales of marketable securities.
Cash flows used in financing activities totaled $4,720,000 primarily
attributable to the Company's repurchase of shares.
8
<PAGE>
For the first three months of 2000, the Company experienced a net decrease in
accounts receivable of $2,714,000 and a decrease in the average number of days
receivables outstanding to 73 days as of March 31, 2000 compared to 76 as of
December 31, 1999. Further, the Company's accounts payable and accrued expenses
decreased $1,691,000 as of March 31, 2000 compared to December 31, 1999.
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 management
information systems, and the repurchase of Company stock. Additionally the
Company expects to incur significant legal costs related to the Department of
Justice actions and shareholder class action lawsuits filed against the Company
(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.
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.
9
<PAGE>
Curative Health Services, Inc. and Subsidiary
Part II. Other Information
Item 1. Legal Proceedings
With respect to the Company's pending litigation and legal actions previously
disclosed, there have been no material developments other than disclosed in Item
3 - "Legal Proceedings" in the Company's Annual Report on form 10K filed for the
year ended December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Forms 8-K
Form 8-K dated January 12, 2000, reporting under Item 5 on a qui tam
action filed under seal in the United States District Court for the Southern
District of New York in 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: May 15, 2000
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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,151
<SECURITIES> 28,777
<RECEIVABLES> 17,939
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 67,774
<PP&E> 25,839
<DEPRECIATION> 14,628
<TOTAL-ASSETS> 84,305
<CURRENT-LIABILITIES> 14,619
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 69,593
<TOTAL-LIABILITY-AND-EQUITY> 84,305
<SALES> 22,200
<TOTAL-REVENUES> 22,200
<CGS> 13,984
<TOTAL-COSTS> 20,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,305
<INCOME-TAX> 916
<INCOME-CONTINUING> 1,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,389
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
