<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________
Commission File Number: 0-22162
SIMIONE CENTRAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3209241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6600 POWERS FERRY ROAD 30339
ATLANTA, GEORGIA (zip code)
(Address of principal
executive offices)
(Registrant's telephone number, including area code) (770) 644-6700
N/A
(Former name, former address and former fiscal year, if changed
since last report)
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
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Outstanding at
Class October 31, 1998
----- ----------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE 8,595,689 SHARES
</TABLE>
<PAGE> 2
SIMIONE CENTRAL HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -September 30, 1998
(unaudited) and December 31, 1997.
Consolidated Statements of Income (Loss) - Three
Months Ended and Nine Months Ended September 30, 1998
and 1997 (unaudited).
Consolidated Statements of Shareholders' Equity -
Nine Months Ended September 30, 1998 (unaudited).
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 (unaudited).
Notes to Consolidated Financial Statements -
September 30, 1998 (unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE> 3
SIMONE CENTRAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 9,624,706 $ 8,266,860
Accounts receivable, net of allowance for doubtful
accounts of $1,881,877 and $1,915,120, respectively 9,578,543 9,025,666
Prepaid expenses and other current assets 935,004 1,157,168
------------ ------------
Total current assets 20,138,253 18,449,694
Purchased software, furniture and equipment, net 1,998,418 2,365,508
Intangible assets, net 7,505,927 7,448,911
Other assets 165,661 655,377
------------ ------------
Total assets $ 29,808,259 $ 28,919,490
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 5,000,000 $ 773,599
Accounts payable 2,237,500 1,876,688
Accrued compensation expense 727,381 560,334
Accrued liabilities 9,408,059 3,174,762
Customer deposits 931,608 1,460,653
Unearned revenues 1,786,510 1,527,173
Current portion of capital lease obligations 12,329 57,622
------------ ------------
Total current liabilities 20,103,387 9,430,831
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized;
none issued or outstanding -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
8,595,689 and 8,522,978 shares issued and outstanding,
respectively 8,595 8,523
Additional paid-in capital 42,091,532 41,686,109
Accumulated deficit (32,395,255) (22,205,973)
------------ ------------
Total shareholders' equity 9,704,872 19,488,659
------------ ------------
Total liabilities and shareholders' equity $ 29,808,259 $ 28,919,490
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited)
Note: The consolidated balance sheet at December 31, 1997 has been derived from
the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. See the Company's December 31,
1997 Form 10-K for such complete financial statements.
<PAGE> 4
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Software and services $ 6,447,327 $ 7,467,259 $ 25,563,765 $ 19,629,252
Agency support 1,219,276 3,434,495 5,886,094 11,602,026
Consulting services 1,813,517 1,207,453 5,024,076 3,545,436
------------ ------------ ------------ ------------
Total net revenues 9,480,120 12,109,207 36,473,935 34,776,714
Costs and expenses:
Cost of revenues 6,102,680 5,516,213 19,099,652 16,131,302
Selling, general and administrative 3,179,353 3,319,884 11,111,181 9,783,031
Research and development 1,935,674 1,730,625 5,325,918 5,172,905
Amortization and depreciation 618,492 411,047 1,777,765 1,238,644
Restructuring and other charges 9,578,420 -- 9,578,420 --
------------ ------------ ------------ ------------
Total costs and expenses 21,414,619 10,977,769 46,892,936 32,325,882
------------ ------------ ------------ ------------
Income (loss) from operations (11,934,499) 1,131,438 (10,419,001) 2,450,832
Other income (expense):
Interest expense (50,475) (40,767) (74,626) (185,702)
Interest and other income 97,538 201,675 304,345 246,230
------------ ------------ ------------ ------------
Net income (loss) $(11,887,436) $ 1,292,346 $(10,189,282) $ 2,511,360
============ ============ ============ ============
Net income (loss) per share - basic $ (1.39) $ 0.16 $ (1.19) $ 0.37
============ ============ ============ ============
Weighted average common shares - basic 8,571,282 8,216,275 8,543,770 6,709,241
============ ============ ============ ============
Net income (loss) per share - diluted $ (1.39) $ 0.14 $ (1.19) $ 0.32
============ ============ ============ ============
Weighted average common shares - diluted 8,571,282 9,051,656 8,543,770 7,853,577
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements (unaudited)
<PAGE> 5
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Shareholders'
Shares Stock Capital Deficit Equity
------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 8,522,978 $8,523 $41,686,109 $(22,205,973) $ 19,488,659
Issuance of $.001 par value common
stock from exercise of stock options 30,392 30 109,440 -- 109,470
Issuance of $.001 par value common
stock related to acquisitions 42,319 42 295,983 -- 296,025
Net loss -- -- -- (10,189,282) (10,189,282)
--------- ------ ----------- ------------ ------------
Balance at September 30, 1998 8,595,689 $8,595 $42,091,532 $(32,395,255) $ 9,704,872
========= ====== =========== ============ ============
</TABLE>
See notes to consolidated financial statements (unaudited)
<PAGE> 6
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,189,282) $ 2,511,360
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Provision for doubtful accounts 636,208 800,087
Amortization and depreciation 1,777,765 1,238,644
Loss on sale of assets -- 28,426
Write-off of excess furniture&fixtures 36,997 --
Write-off of capitalized R&D 2,005,790 --
Changes in operating assets and liabilities:
Accounts receivable (1,172,435) (3,969,662)
Prepaid expenses and other current assets 222,164 154,150
Other assets (1,530,015) (120,239)
Accounts payable 360,812 (1,555,520)
Accrued compensation expense 167,047 362,270
Accrued liabilities 5,878,136 (434,045)
Customer deposits (530,045) 339,468
Unearned revenues 259,337 (1,021,322)
------------ ------------
Net cash used in operating activities (2,077,521) (1,666,383)
Cash flows from investing activities:
Purchase of acquired companies, net of cash acquired (405,191) --
Purchase of software, furniture and equipment (377,994) (566,561)
Decrease in restricted cash -- 1,000,000
Increase in other intangible assets (71,046) --
------------ ------------
Net cash provided by (used in) investing activities (854,231) 433,439
Cash flows from financing activities:
Proceeds from (payment on) line of credit 4,226,401 (1,486,479)
Principal payments on capital lease obligations (45,293) (224,218)
Payments of related party notes (980) (30,172)
Proceeds from repayment of stock subscription -- 850,000
Proceeds from issuance of common stock less offering costs of $2,280,782 -- 17,719,218
Proceeds from exercise of stock options and warrants 109,470 550,833
------------ ------------
Net cash provided by financing activities 4,289,598 17,379,182
------------ ------------
Net increase in cash and cash equivalents 1,357,846 16,146,238
Cash and cash equivalents, beginning of period 8,266,860 3,384,728
------------ ------------
Cash and cash equivalents, end of period $ 9,624,706 $ 19,530,966
============ ============
Supplemental disclosure of non-cash investing activities
Software, furniture and equipment obtained through capital leases $ -- $ 39,904
</TABLE>
See notes to consolidated financial statements (unaudited)
<PAGE> 7
SIMIONE CENTRAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the Company and are
unaudited. In the opinion of management, all adjustments (which consist of
normal recurring adjustments) considered necessary for a fair presentation have
been included. Interim results are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
as of December 31, 1997 appearing in the Company's Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the 1998
financial statement presentation.
DESCRIPTION OF BUSINESS
The Company is a leading provider of integrated systems and services designed to
enable home health care providers to more effectively operate their businesses
and compete in a managed care environment. The Company offers several
comprehensive and flexible software solutions, each of which provide a core
platform of software applications and which incorporate selected specialized
modules based on customer demand. These software solutions are designed to
enable customers to generate and utilize comprehensive financial, operational
and clinical information. These software solutions are made available to
customers in two arrangements: a Shared Resource Solution or an In-House
Solution. The Company's Shared Resource Solution offers customers an outsourcing
opportunity which incorporates the Company's proprietary software. Under this
arrangement, the Company operates a data center which stores customer data and
allows them real-time, secure access through a wide area communications network.
The Company's In-House Solution is licensed to customers for use on their own
computer systems. In addition to its software solutions and related software
support services, the Company's home health care consulting services assist
providers in addressing the challenges of reducing costs, maintaining quality,
streamlining operations and re-engineering organizational structures. The
Company also provides comprehensive agency support services which include
administrative, billing and collection, training, reimbursement and financial
management services, among others.
<PAGE> 8
SIMIONE CENTRAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 2 - ACQUISITION
Effective December 1, 1997, the Company purchased substantially all the assets
of Dezine Healthcare Solutions, Inc. ("Dezine"). The acquisition was accounted
for using the purchase method for financial reporting purposes.
Unaudited pro forma information giving effect to the acquisition as if it took
place on January 1, 1997 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Net revenues $13,857,458 $ 40,070,264
Net income (loss) $ 1,353,994 $ (5,488,190)
Net income (loss) per share - basic $ 0.16 $ (0.82)
Net income (loss) loss per share - diluted $ 0.15 $ (0.82)
Weighted average common shares - basic 8,216,275 6,709,241
Weighted average common shares - diluted 9,051,656 6,709,241
</TABLE>
The three months ended September 30, 1997 pro forma net loss includes pro forma
adjustments for a net charge of $52,605 for additional amortization expense
related to the allocation of the purchase price to intangible assets. The nine
months ended September 30, 1997 pro forma net loss includes pro forma
adjustments for a $8,126,947 charge to operations for purchased in-process
research and development costs and a net charge of $157,815 for additional
amortization expense related to the allocation of the purchase price to
intangible assets. This pro forma information does not purport to be indicative
of the results that actually would have occurred if the acquisition had been
effective on the date indicated or which may be obtained in the future.
NOTE 3 - INCOME TAXES
At December 31, 1997, the Company had approximately $4,640,000 of net operating
losses ("NOL") for income tax purposes available to offset future taxable
income. Such losses expire $1,824,000 in 2010 and $2,816,000 in 2011 and may be
subject to certain limitations for changes in ownership. A valuation allowance
reducing net deferred tax assets recognized to zero has been recorded based on
management's assessment that it is not "more likely than not" that the assets
are realizable as of September 30, 1998.
NOTE 4 - MAJOR CUSTOMERS
For the three months and nine months ended September 30, 1998, affiliates of
Columbia/HCA Healthcare Corporation accounted for approximately 28.3% and 33.8%,
respectively, of the Company's total net revenue and for 6.3% of net accounts
receivable. (See Note 8)
<PAGE> 9
SIMIONE CENTRAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 5 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
On May 11, 1998, the Company entered into a Loan and Security Agreement with a
bank. Pursuant to the Agreement, the bank agreed to make available to the
Company a revolving credit facility, the maximum principal amount of which at
any time must be equal to the lesser of $25 million or the "margin requirement"
then in effect. Interest will accrue at a variable rate per annum equal to the
prime rate for prime borrowings (8.5% as of September 30, 1998) or the LIBOR
Rate plus 1.5%-3.0% per annum (depending on the leverage ratio measured
quarterly) for the LIBOR borrowings (7.2% as of September 30, 1998). Under the
terms of the Agreement, the Company granted to the bank a security interest in
all accounts, inventory, equipment, and general intangibles. Additionally, the
Company's subsidiaries have also guaranteed the Company's obligations to the
bank under the Agreement. As of September 30, 1998, there was a balance of $5
million outstanding and none available for future borrowings. The Company is in
default of certain covenants, including a financial covenant related to the
ratio of funded debt to EBITDA (leverage ratio), associated with this Agreement
and is in discussions with the bank concerning such defaults (see Part II, Item
3).
NOTE 6 - RESTRUCTURING AND OTHER CHARGES
As a result of the change in the home care business environment resulting from
IPS coupled with the decision to eliminate certain legacy development projects
including the AS400 effort, the Company incurred severance and certain other
restructuring costs totaling $9.6 million in the third quarter of 1998. These
expenses include a $2 million write-off of capitalized software and the
remainder primarily relates to severance from a reduction in force, costs to
terminate contracts with third party vendors, and costs related to excess
capacity.
NOTE 7 - RECENTLY ADOPTED ACCOUNTING STANDARDS
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. Per share amounts for all periods
have been presented in conformity with SFAS No. 128 requirements. The diluted
weighted average common shares were calculated as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average - basic 8,571,282 8,216,275 8,543,770 6,709,241
Common stock equivalents
-- 835,381 -- 1,144,336
--------- --------- --------- ---------
Weighted average - diluted
8,571,282 9,051,656 8,543,770 7,853,577
========= ========= ========= =========
</TABLE>
In January 1998, the Company adopted the AICPA Statement of Position 97-2,
"Software Revenue Recognition," ("SOP 97-2"), which supersedes SOP 91-1. While
some principles remain the same, there are several key differences between the
two pronouncements, including accounting for multiple element arrangements. The
Company, based on its reading and interpretation of SOP 97-2, has accounted for
license and services agreements that require modifications to the software using
contract accounting for both the license fees and services. This new treatment
may have resulted in a deferral of license revenue compared to revenue
recognition under SOP 91-1 for some agreements.
<PAGE> 10
SIMIONE CENTRAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 8 - SUBSEQUENT EVENT
On November 5, 1998, Amedisys, Inc. signed a definitive asset purchase agreement
to acquire Columbia/HCA homecare operations in several states. Included in the
agreement are businesses currently under contracts with the Company related to
information systems and agency support services. In the event that such
transaction closes, the loss of any of the Columbia/HCA contracts could have a
material adverse impact on the Company's business, financial condition and
results of operations.
<PAGE> 11
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended, and are
subject to the safe harbor created by such sections. When used in this report,
the words "believe", "anticipate", "estimate", "expect", and similar expressions
are intended to identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. The Company's actual results may differ significantly from the results
discussed in such forward-looking statements. When appropriate, certain factors
that could cause results to differ materially from those projected in the
forward-looking statements are enumerated. This Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto.
OVERVIEW
The Company is a leading provider of integrated systems and services
designed to enable home health care providers to more effectively operate their
businesses and compete in a managed care environment. The Company offers several
comprehensive and flexible software solutions, each of which provide a core
platform of software applications and which incorporate selected specialized
modules based on customer demand. These software solutions are designed to
enable customers to generate and utilize comprehensive financial, operational
and clinical information. These software solutions are made available to
customers in two arrangements: a Shared Resource Solution or an In-House
Solution. The Company's Shared Resource Solution offers customers an outsourcing
opportunity which incorporates the Company's proprietary software. Under this
arrangement, the Company operates a data center which stores customer data and
allows them real-time, secure access through a wide area communications network.
The Company's In-House Solution is licensed to customers for use on their own
computer systems. In addition to its software solutions and related software
support services, the Company's home health care consulting services assist
providers in addressing the challenges of reducing costs, maintaining quality,
streamlining operations and re-engineering organizational structures. The
Company also provides comprehensive agency support services which include
administrative, billing and collection, training, reimbursement and financial
management services, among others.
The Company enters into multi-year contracts (generally 3 to 5 years)
with its customers in connection with its Shared Resource Solution and its
provision of agency support services. In general, these contracts provide for
the payment of monthly fees based on the number of billed home care visits made
by the customer or for its Shared Resource Solution customers on the number of
users of the system. Revenues derived under these contracts are recognized
monthly as the related services are rendered and typically range from several
hundred thousand dollars to several million dollars per year. As a result, the
loss of any of these contracts could have a material adverse impact on the
Company's business, financial condition and results of operations.
The Company sells its In-House Solution pursuant to non-exclusive
license agreements which provide for the payment of a one-time license fee. In
accordance with SOP 97-2, these revenues are recognized when products are
delivered and the collectibility of fees is probable, provided that no
significant obligations remain under the contract. Revenues derived from the
sale of software products requiring significant modification or customization
are recognized based upon the percentage of completion method. The price of the
Company's In-House Solution varies depending on the number of software modules
licensed and the number of users accessing the system and can range from ten
thousand dollars to a few million dollars. The Company generally requires
payment of a deposit upon the signing of a customer order as well as certain
additional payments prior to delivery. As a result, the Company's balance sheet
reflects significant customer deposits.
<PAGE> 12
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW (CONTINUED)
Third party software and computer hardware revenues are recognized when
the related products are shipped. Software support agreements are generally
renewable for one year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company charges for software implementation, training and
technical consulting services as well as management consulting services on an
hourly or daily basis. The price of such services varies depending on the level
and expertise of the related professionals. These revenues are recognized as the
related services are performed.
The Company typically experiences long sales cycles for information
systems and agency support services, which may extend up to one year or longer
due to a change in government reimbursement. In addition, the implementation
period related to its information systems can range from three months to one
year.
The Company defines recurring revenues as revenues derived under
multi-year contracts in addition to annual software support agreements. These
revenues were approximately $2.2 million, or 23.0% and $6.3 million, or 17.3% of
total net revenues, for the three months and nine months ended September 30,
1998, respectively and $7.1 million, or 69.06% and $22.1 million, or 64.0% of
total net revenues for the three months and nine months ended September 30,
1997.
For the three months and nine months ended September 30, 1998, the
Company derived 28.3% and 33.88%, respectively of its total net revenues from
contracts with affiliates of Columbia/HCA. For the three months and nine months
ended September 30, 1997, the Company derived 47.0% and 50.5%, respectively of
its total net revenues from contracts with affiliates of Columbia/HCA. On
November 5, 1998, Amedisys, Inc. signed a definitive asset purchase agreement to
acquire Columbia/HCA homecare operations in several states. Included in the
agreement are businesses currently under contracts with the Company related to
information systems and agency support services. In the event that such
transaction closes, the loss of any of the Columbia/HCA contracts could have a
material adverse impact on the Company's business, financial condition and
results of operations.
The Company believes that continued development and enhancement of its
software systems is critical to its future success; however, due to the
elimination of certain legacy development projects including the AS400 platform,
the Company anticipates that the total dollar amount of research and development
expense will decrease. Costs incurred to establish the technological feasibility
of computer software products are expensed as incurred. The Company's policy is
to capitalize costs incurred between the point of establishing technological
feasibility and general release only when such costs are material. During the
quarter ended September 30, 1998, the Company recorded a write-off of $2 million
of capitalized software to reflect the abandonment of certain development
projects. For the three months and nine months ended September 30, 1997, the
Company capitalized $44,900 and $135,900, respectively, of computer software
development costs.
<PAGE> 13
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR 2000 ISSUES
Year 2000 issues arise because many computer software and hardware
systems use only two digits to represent the year. As a result, these systems
may not process dates beyond 1999, which may cause errors in information or
system failures. Therefore, some computer software and hardware will need to be
modified prior to the Year 2000 in order to remain functional. The Company is
assessing both the readiness of its internal computer systems and the compliance
of its software and computer products licensed and sold to customers for
handling Year 2000 issues. The Company expects to implement successfully the
systems and programming changes necessary to address such Year 2000 issues, and
does not believe that the cost of such actions will have a material effect on
the Company's results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations or financial condition.
Certain software and hardware products currently installed at customer
sites will require upgrade to become Year 2000 compliant. The Company believes
that it is not legally responsible for costs incurred by its customers to
achieve their Year 2000 compliance. However, the Company is taking steps to
identify affected customers, raise customer awareness related to non-compliance
of the Company's older software and other products, and assist the customer base
to assess their risks.
The Company is also assessing and addressing the possible effects on
the Company's operations of the Year 2000 readiness of key vendors and 3rd party
software providers. The Company's reliance on vendors and 3rd party software
providers, and therefore, on the proper functioning of their information systems
and software, means that their failure to address Year 2000 issues could have a
material impact on the Company's operations and financial results. However, the
potential impact and related costs are not known at this time.
BACKLOG
The Company had backlog associated with its In-House Solution of
approximately $5.2 million and $7.7 million on September 30, 1998 and 1997,
respectively. Backlog consists of the unrecognized portion of contractually
committed software license fees, hardware, estimated installation fees and
professional services. The length of time required to complete an implementation
depends on many factors outside the control of the Company, including the state
of the customer's existing information systems and the customer's ability to
commit the personnel and other resources necessary to complete the
implementation process. As a result, the Company may be unable to predict
accurately the amount of revenue it will recognize in any period and therefore
can make no assurances that the amounts in backlog will be recognized in the
next twelve months.
The Company enters into multi-year contracts with its customers in
connection with its Shared Resource Solution. These contracts generally provide
for the payment of monthly fees based on the number of billed home care visits
made by the customer. Accordingly, the Company does not maintain a backlog with
respect to its Shared Resources Solution.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997
Net Revenues. Total net revenues for the three months ended September 30, 1998
decreased $2.6 million, or 21.7%, to $9.5 million as compared to the three
months ended September 30, 1997. The decrease includes a $3.0 million decrease
in revenue from the Columbia/HCA contracts due to the declining number of
visits, a $1.6 million decrease in new software sales, a $1.6 million increase
attributable to the business acquired in the Dezine Healthcare Solutions, Inc.
("Dezine") acquisition which was completed effective December 1, 1997, and a
$600,000 increase in consulting revenues.
<PAGE> 14
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997 (CONTINUED)
Cost of Revenues. Total cost of revenues increased $586,000, or 10.6%, to $6.1
million for the three months ended September 30, 1998 as compared to the three
months ended September 30, 1997. The increase in costs includes a $660,000
increase attributable to the business acquired in the Dezine acquisition and a
$331,000 decrease primarily due to the decline in software sales. As a
percentage of total net revenues, total costs of revenues increased to 64.4% for
the three months ended September 30, 1998 from 45.6% for the three months ended
September 30, 1997. This percentage increase reflects the decrease in total net
revenues compared to a relatively constant level of dollar expenditures.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the three months ended September 30, 1998 decreased
$198,000 to $3.1 million as compared to the three months ended September 30,
1997. The decrease in costs includes a $727,000 decrease in administrative costs
offset by an increase of $556,000 attributable to the business acquired in the
Dezine acquisition. As a percentage of total net revenues, selling, general and
administrative expenses were 32.9% for the three months ended September 30, 1998
compared with 27.4% for the three months ended September 30, 1997.
Research and Development Expenses. Research and development expenses for the
three months ended September 30, 1998 increased $205,000, or 11.9%, to $1.9
million as compared to the three months ended September 30, 1997. This increase
is primarily attributable to the business acquired in the Dezine acquisition. As
a percentage of total net revenues, these expenses increased to 20.4% for the
three months ended September 30, 1998, from 14.3% for the three months ended
September 30, 1997. This percentage increase reflects the decrease in total net
revenues compared to a constant level of dollar expenditures.
Amortization and Depreciation. Depreciation and amortization expense for the
three months ended September 30, 1998 increased by $200,000 to $600,000 as
compared to the three months ended September 30, 1997. This increase includes
$60,000 of amortization expense related to the $1.3 million of intangible assets
recorded in the Dezine acquisition, and the remainder relates to increased
depreciation expense.
Restructuring and Other Charges. The Company recorded a restructuring charge
totaling $9.6 million as a result of the change in the home care business
environment resulting from IPS coupled with the decision to eliminate certain
legacy development projects including the AS400 effort. These expenses include a
$2 million write-off of capitalized software and the remainder primarily relates
to severance from a reduction in force, costs to terminate contracts with third
party vendors, and costs related to excess capacity.
Other Income (Expense). Interest expense for the three months ended September
30, 1998 and 1997 relates to borrowings under the Company's line of credit
agreement. Interest and other income for the three months ended September 30,
1998 and 1997 consists principally of interest income related to the Company's
short-term cash investments.
Income Taxes. At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal and state income tax purposes of $4.6 million, which
expire at various dates through 2011, if not utilized. The Company also has
research and development and alternative minimum tax credits ("tax credits") of
approximately $96,000 available to reduce future income tax liabilities. The Tax
Reform Act of 1986, as amended, contains provisions that limit the NOL and tax
credit carryforwards available to be used in any given year when certain events
occur, including additional sales of equity securities and other changes in
ownership. As a result, certain of the NOL and tax credit carryforwards may be
limited as to their utilization in any year. The Company has concluded that it
is more likely than not that these NOLs and tax credit carryforwards will not be
utilized based on a weighing of evidence at September 30, 1998, and as a result,
a 100% deferred tax valuation allowance has been recorded against these assets.
Approximately $500,000 of the total deferred tax asset relates to the IMHI
acquisition and, if and when realized, will result in a credit to intangible
assets recorded in the acquisition.
<PAGE> 15
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997
Net Revenues. Total net revenues for the nine months ended September 30, 1998
increased $1.7 million, or 4.9%, to $36.5 million as compared to the nine months
ended September 30, 1997. The increase includes a $4.8 million increase
attributable to the business acquired in the Dezine Healthcare Solutions, Inc.
("Dezine") acquisition which was completed effective December 1, 1997, a $1.5
million increase in consulting revenue, a $3.8 million decrease in revenue from
the Columbia HCA contracts due to the declining number of visits, and a $1.0
million decrease in new software sales and related services.
Cost of Revenues. Total cost of revenues increased $3.0 million, or 18.4%, to
$19.1 million for the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997. The increase includes $2.0 million in
costs attributable to the business acquired in the Dezine acquisition. As a
percentage of total net revenues, total costs of revenues increased to 52.4% for
the nine months ended September 30, 1998 from 46.4% for the nine months ended
September 30, 1997.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the nine months ended September 30, 1998 increased
$1.3 million to $11.1 million as compared to the nine months ended September 30,
1997. This increase includes $1.6 million in costs attributable to the business
acquired in the Dezine acquisition, a $585,000 increase in sales personnel hired
to market the Company's products and services, and a $959,000 decrease in
administrative costs. As a percentage of total net revenues, selling, general
and administrative expenses were 30.3% for the nine months ended September 30,
1998 compared with 28.1% for the nine months ended September 30, 1997.
Research and Development Expenses. Research and development expenses for the
nine months ended September 30, 1998 increased $153,000, or 3.0%, as compared to
the nine months ended September 30, 1997. As a percentage of total net revenues,
these expenses decreased to 14.6% for the nine months ended September 30, 1998,
from 14.9% for the nine months ended September 30, 1997. This percentage
decrease reflects the increase in total net revenues compared to a relatively
constant level of dollar expenditures.
Amortization and Depreciation. Depreciation and amortization expense for the
nine months ended September 30, 1998 increased by $539,000 to $1.8 million as
compared to the nine months ended September 30, 1997. This increase includes
$220,000 of amortization expense related to the $1.3 million of intangible
assets recorded in the Dezine acquisition, and the remainder relates to
increased depreciation expense.
Restructuring and Other Charges. The Company recorded a restructuring charge
totaling $9.6 million as a result of the change in the home care business
environment resulting from IPS coupled with the decision to eliminate certain
legacy development projects including the AS400 effort. These expenses include a
$2 million write-off of capitalized software and the remainder primarily relates
to severance from a reduction in force, costs to terminate contracts with third
party vendors, and costs related to excess capacity.
Other Income (Expense). Interest expense for the nine months ended September 30,
1998 and 1997 relates to borrowings under the Company's line of credit
agreement. Interest and other income for the nine months ended September 30,
1998 and 1997 consists principally of interest income related to the Company's
short-term cash investments.
<PAGE> 16
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997 (CONTINUED)
Income Taxes. At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal and state income tax purposes of $4.6 million, which
expire at various dates through 2011, if not utilized. The Company also has
research and development and alternative minimum tax credits ("tax credits") of
approximately $96,000 available to reduce future income tax liabilities. The Tax
Reform Act of 1986, as amended, contains provisions that limit the NOL and tax
credit carryforwards available to be used in any given year when certain events
occur, including additional sales of equity securities and other changes in
ownership. As a result, certain of the NOL and tax credit carryforwards may be
limited as to their utilization in any year. The Company has concluded that it
is more likely than not that these NOLs and tax credit carryforwards will not be
utilized based on a weighing of evidence at September 30, 1998, and as a result,
a 100% deferred tax valuation allowance has been recorded against these assets.
Approximately $500,000 of the total deferred tax asset relates to the IMHI
acquisition and, if and when realized, will result in a credit to intangible
assets recorded in the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company's cash and
cash equivalents increased by $1.4 million. The increase was principally
attributable to an increase in the net borrowings from the line of credit of
$4.2 million, offset by negative operating cash flows of $2.1 million and net
investing activities of $854,000.
In May 1998, the Company entered into a Loan and Security Agreement
with a bank. Pursuant to the Agreement, the bank agreed to make available to the
Company a revolving credit facility, the maximum principal amount of which at
any time must be equal to the lesser of $25 million or the "margin requirement"
then in effect. Interest will accrue at a variable rate per annum equal to the
prime rate or the LIBOR Rate plus 1.5%-3.0% per annum (depending on the
leveraged ratio measured quarterly) for the LIBOR borrowings. Under the terms of
the Agreement, the Company granted to the bank a security interest in all
accounts, inventory, equipment and general intangibles. Additionally, the
Company's subsidiaries have also guaranteed the Company's obligations to the
bank under the Agreement. The Company has $5 million outstanding at September
30, 1998 and none available for future borrowings. The Company is in default of
certain covenants, including a financial covenant related to the ratio of funded
debt to EBITDA (leverage ratio), associated with this Agreement and is in
discussions with the bank concerning such defaults (see Part II, Item 3.)
The Company believes that its available cash, cash equivalents, cash to
be generated from its future results of operations should be sufficient to meet
the Company's operating requirements, assuming no material adverse change in the
operation of the Company's business, for at least the next twelve months.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standard Board ("FASB")
issued Statement of Financial Accounting Standard No. 128, "Earnings per Share"
(SFAS 128"), which changed the method of computing earnings per share. SFAS 128
requires presentation of basic earnings per share and diluted earnings per share
amounts, as defined. See Note 6 in the Notes to Consolidated Financial
Statements. SFAS 128 is effective for the Company's year ended December 31,
1997, and as a result all prior-period earnings per share data presented have
been restated to conform with the provisions of the new pronouncement.
In January 1998, the Company adopted the AICPA Statement of Position
97-2, "Software Revenue Recognition," ("SOP 97-2"), which supersedes SOP 91-1
and is effective for transactions entered into for fiscal years beginning after
December 15, 1997. While some principles remain the same, there are several key
differences between the two pronouncements, including accounting for multiple
element arrangements.
<PAGE> 17
SIMIONE CENTRAL HOLDINGS, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPACT OF NEW ACCOUNTING STANDARDS (CONTINUED)
The Company has adopted FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position. The adoption of SFAS 130 had no impact on the
consolidated financial statements of the Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS 131 requires reporting segment profit or loss,
certain specific revenue and expense items, and segment assets. It requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts in the enterprise's general -purpose financial statements. It requires
that all public business enterprises report information about the revenues
derived from the enterprise's products or services (or groups of similar
products and services), about the countries in which the enterprise earns
revenues and holds assets, and about major customers regardless of whether that
information is used in making operating decisions. SFAS is effective for
financial statements for periods beginning after December 15, 1997. The Company
intends to adopt SFAS 131 and does not expect the application to have a material
impact on the consolidated financial statements of the Company.
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor any of its subsidiaries is currently a
party to any legal proceedings which would be material to the business
or financial condition of the Company on a consolidated basis. The
Company was, however, served on July 17, 1997 with an administrative
subpoena issued by the United States Department of Health and Human
Services, Office of Inspector General. In connection with that
subpoena, the Department of Justice ("DOJ") has advised the Company
that certain aspects of the Company's past relationship with affiliates
of Columbia/HCA Healthcare Corporation are within the scope of an
ongoing grand jury investigation. However, the DOJ has confirmed to the
Company that neither the Company, nor any of its officers, directors or
employees, is a target in this investigation and, based upon the
information known to the DOJ at this time, neither the Company, nor any
of its officers, directors or employees, is likely to become one. The
Company is cooperating fully with the government and does not currently
believe that this inquiry will have any material effect on its overall
business or financial condition.
Item 2. Change in Securities.
None.
Item 3. Defaults Upon Senior Securities.
On May 11, 1998, the Company entered into a Loan and Security
Agreement with a bank (see Note 5). As of September 30, 1998, there was
a balance of $5 million outstanding and none available for future
borrowings. The Company is in default of certain covenants, including a
financial covenant related to the ratio of funded debt to EBITDA
(leverage ratio), a covenant related to a rating assigned to an
investment in commercial paper (such commercial paper is rated A-2, P-2
versus A-1, P-1 and matures on November 17, 1998), and a covenant
related to time deposits issued by a bank which does not meet certain
capital surplus requirements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following Exhibits are filed as part of this
Quarterly Report on Form 10-Q:
Exhibit No. Description
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K:
None.
<PAGE> 19
EXHIBIT INDEX
27.1 Financial Data Schedule (for SEC Use Only).
<PAGE> 20
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.
SIMIONE CENTRAL HOLDINGS, INC.
Dated: November 13, 1998 By: /s/ Barret C. O'Donnell
-------------------------------------
BARRETT C. O'DONNELL
Chairman of the Board and Chief Executive
Officer
Dated: November 13, 1998 By: /s/Lori Nadler Siegel
-------------------------------------
LORI NADLER SIEGEL
Chief Financial Officer
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