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, 2000
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:
Outstanding at
Class 10/31/2000
----- ---------------
COMMON STOCK, $.001 PAR VALUE 3,849,816 SHARES
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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, 2000 (unaudited) and
December 31, 1999 (audited).
Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 2000 and 1999 (unaudited).
Consolidated Statements of Shareholders' Equity - Nine Months Ended
September 30, 2000 (unaudited).
Consolidated Statements of Cash Flows - Nine Months Ended September
30, 2000 and 1999 (unaudited).
Notes to Consolidated Financial Statements - September 30, 2000
(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
2
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SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ -----------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,661,000 $ 47,000
Accounts receivable, net of
allowance for doubtful accounts
of $542,000 and $166,000 respectively 8,621,000 4,329,000
Prepaid expenses and other current assets 645,000 273,000
------------------ -----------------
Total current assets 10,927,000 4,649,000
Purchased software, furniture and equipment, net 2,136,000 920,000
Intangible assets, net 24,634,000 -
Other assets 273,000 1,127,000
------------------ -----------------
Total assets $ 37,970,000 $ 6,696,000
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 4,598,000 $ -
Notes Payable 600,000 -
Accounts payable 1,986,000 1,137,000
Accrued compensation expense 511,000 393,000
Accrued liabilities 6,986,000 1,334,000
Customer deposits 2,403,000 419,000
Unearned revenues 5,091,000 2,908,000
------------------ -----------------
Total current liabilities 22,175,000 6,191,000
Accrued liabilities, less current portion 393,000 -
Note payable long-term 600,000 -
Commitments and contingencies
Shareholders' equity:
Preferred Stock ; 10,000,000 shares authorized
Series B Preferred, $.001 par value;
5,600,000 issued and outstanding 6,000 -
Series C Preferred, $.001 par value;
850,000 issued and outstanding 1,000 -
Series D Preferred, $.001 par value;
398,000 issued and outstanding - -
Common stock, $.001 par value; 20,000,000 shares authorized;
3,850,000 shares issued and outstanding at September 30, 2000
1,490,000 shares issued and outstanding at December 31, 1999 4,000 1,000
Additional paid-in capital 21,070,000 1,260,000
Stock warrants 1,000,000 -
Accumulated deficit (7,279,000) (756,000)
------------------ -----------------
Total shareholders' equity 14,802,000 505,000
------------------ -----------------
Total liabilities and shareholders' equity $ 37,970,000 $ 6,696,000
================== =================
</TABLE>
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes
MCS, Inc. is deemed to have acquired Simione Central Holdings, Inc. on March 7,
2000, the date of the merger, as more fully explained in Notes 1 and 2 to the
Consolidated Financial Statements.
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SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER 30,
30,
--------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- --------------- ------------------ ----------------
Net revenues: $ 8,547,000 $3,797,000 $18,805,000 $12,519,000
Costs and expenses:
Cost of revenues 3,756,000 2,339,000 10,258,000 7,669,000
Selling, general and administrative 3,262,000 986,000 7,522,000 3,152,000
Research and development 1,897,000 300,000 4,388,000 831,000
Amortization and depreciation 1,171,000 57,000 2,780,000 170,000
---------------- -------------- ------------------ ----------------
Total costs and expenses 10,086,000 3,682,000 24,948,000 11,822,000
---------------- -------------- ------------------ ----------------
(Loss) income from operations (1,539,000) 115,000 (6,143,000) 697,000
Other (expense) income:
Other (expense) income - - (6,000) -
Interest expense (316,000) - (582,000) -
Interest and other income 17,000 13,000 57,000 28,000
---------------- --------------- ------------------ ----------------
---------------- --------------- ------------------ ----------------
Net (loss)income before taxes (1,838,000) 128,000 (6,674,000) 725,000
---------------- --------------- ------------------ ----------------
Income tax benefit (expense) (7,000) (52,000) 151,000 (284,000)
---------------- --------------- ------------------ ----------------
Net (loss) income from continuing operations (1,845,000) 76,000 (6,523,000) 441,000
---------------- --------------- ------------------ ----------------
Discontinued operation
Income from operations of discontinued
segment before taxes - 54,000 - 251,000
Applicable tax expense - 22,000 - 100,000
Net income from operations of discontinued ---------------- --------------- ----------------- ----------------
segment - 32,000 - 151,000
---------------- --------------- ----------------- ----------------
Net (loss) income $ (1,845,000) $ 108,000 $ (6,523,000) $ 592,000
================ =============== ================= ================
Net (loss) income per share - basic and
diluted
From continuing operations $ (0.48) $ 0.05 $ (1.99) $ 0.30
================ =============== ================= ===============
Weighted average common shares -
basic and diluted 3,850,000 1,490,000 3,273,000 1,490,000
================ =============== ================= ================
Net (loss) income per share - basic and
diluted
From discontinued operations $ - $ 0.02 $ - $ 0.10
================ =============== ================= ================
Weighted average common shares -
basic and diluted 3,850,000 1,490,000 3,273,000 1,490,000
================ =============== ================= ================
Net (loss) income per share - basic and
diluted
From discontinued operations $ (0.48) $ 0.07 $ (1.99) $ 0.40
================ =============== ================= ================
Weighted average common shares -
basic and diluted
3,850,000 1,490,000 3,273,000 1,490,000
================ =============== ================= ================
</TABLE>
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes
MCS, Inc. is deemed to have acquired Simione Central Holdings, Inc. on March 7,
2000, the date of the merger, as more fully explained in Notes 1 and 2 to the
Consolidated Financial Statements.
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SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Common Preferred Additional Total
------------------- ---------------- Paid-In Accumulated Shareholders'
Shares Stock Shares Stock Capital Warrants Deficit Equity
------ ----- ------ ----- ------- -------- ----------- -------------
Balance at December 31, 1999 1,000 $ 1,000 - $ - $ 1,260,000 $ - $ (756,000) $ 505,000
MCS, Inc. shares eliminated
in merger (1,000) (1,000) (1,000)
Simione Central Holdings, Inc.
Shares post merger,
$.001 par value 3,850,000 4,000 - - 19,810,000 1,000,000 20,814,000
Issuance of $.001 par value
preferred stock in
connection with merger - - 6,848,000 7,000 - 7,000
Series B, 5,600,000 shares
Series C, 850,000 shares
Series D, 398,000 shares -
Net loss - - - - - 6,523,000) (6,523,000)
---------- --------- --------- ------ ----------- ---------- ------------ -----------
Balance at September 30, 2000 3,850,000 $ 4,000 6,848,000 $7,000 $21,070,000 $1,000,000 $(7,279,000) $14,802,000
========== ========= ========= ====== =========== ========== ============ ===========
See notes to consolidated financial statements.
The above financial statements reflect the fact that for accounting purposes MCS, Inc. is deemed to have acquired Simione Central
Holdings, Inc. on March 7, 2000, the date of the merger, as more fully explained in Notes 1 and to the Consolidated
Financial Statements.
</TABLE>
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SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2000 1999
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,523,000) $ 592,000
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Provision for doubtful accounts
376,000 -
Amortization and depreciation
2,780,000 151,000
CHANGES IN ASSETS AND LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable (905,000) 210,000
Prepaid expenses and other current assets 215,000 42,000
Other assets (117,000) -
Accounts payable (1,182,000) (183,000)
Accrued compensation expense (192,000) (343,000)
Accrued liabilities (1,225,000) 613,000
Customer deposits 856,000 202,000)
Unearned revenues 817,000 (620,000)
--------------- --------------
Net cash (used) in provide by
operating activities (5,100,000) 260,000
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Simione (net of cash acquired) (12,148,000) -
Net cash acquired in the reverse merger 3,547,000 -
Purchase of software, furniture and equipment (408,000) (206,000)
--------------- --------------
Net cash used in investing activities (9,009,000) (206,000)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity issued in Simione/MCS merger 12,148,000 -
Capital contribution from former parent - 80,000
Proceeds from (payment on) notes payable 7,000 -
Proceeds from issuance of preferred stock 1,000,000 -
Increase in notes payable 2,568,000 -
Dividends paid - (161,000)
--------------- --------------
Net cash provided by (used in)financian activities 15,723,000 (81,000)
--------------- --------------
Net change in cash and cash equivalents 1,614,000 (27,000)
Cash and cash equivalents, beginning of periodb 47,000 60,000
--------------- --------------
Cash and cash equivalents, end of period $ 1,661,000 $ 33,000
=============== ==============
See notes to consolidated financial statements
The above financial statements reflect the fact that for accounting purposes MCS, Inc. is deemed to have acquired Simione Central
Holdings, Inc. on March 7, 2000, the date of the merger, as more fully explained in Notes 1 and 2 to the Consolidated
Financial Statements.
6
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</TABLE>
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SIMIONE CENTRAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCS AS DEEMED ACQUIRER OF SIMONE CENTRAL HOLDINGS, INC.
On March 7, 2000, Simione Central Holdings, Inc. ("Simione") and MCS, Inc.
("MCS") merged in a transaction accounted for as a reverse acquisition for
financial reporting purposes. In connection with the acquisition, Simione issued
1,489,853 shares of its common stock in exchange for all the outstanding common
stock of MCS, and thereby, the former shareholders of MCS acquired control of
Simione. As a result, MCS is considered the acquiring company; hence, the
historical financial statements of MCS became the historical financial
statements of Simione and include the results of operations of Simione only from
the effective acquisition date.
The weighted average common shares for the nine month period ended
September 30, 2000 are recast in the accompanying Consolidated Statements of
Operations to give effect to the 1,489,853 shares of Simione common stock that
were issued to the MCS shareholders in connection with the Simione/MCS merger on
March 7, 2000 as though such shares had been outstanding for the entire period.
For the period from January 1, 2000 through March 6, 2000, therefore, 1,489,853
shares of issued and outstanding Simione common stock are deemed to be owned by
the MCS shareholders. For the period from March 7, 2000 through September 30,
2000, there were 3,849,816 total shares of issued and outstanding Company common
stock (after giving effect to the Simione/MCS merger). The weighted average
shares for the nine month period ended September 30, 1999 are also recast to
give effect to the 1,489,853 shares of Simione common stock that were issued to
the MCS shareholders pursuant to the Simione/MCS merger as though such shares
had been outstanding for the entire period.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the Company
(which as used herein refers to Simione, after giving effect to the merger with
MCS and, as the context requires, MCS, prior to the Simione/MCS merger), include
the results of operations of the parent company and its wholly owned
subsidiaries, and are unaudited (except for the December 31, 1999 balance
sheet). In the opinion of management, all adjustments (which consist of normal
recurring adjustments) considered necessary for a fair presentation have been
included. All intercompany balances and transactions have been eliminated.
Interim results are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
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, 1999 appearing in the Company's Report on Form 10-K filed on
May 22, 2000.
Certain prior period amounts have been reclassified to conform to the 2000
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 the prospective payment system (PPS) and managed care
environments. 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. 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, as well as assisting with regulatory compliance and
merger and acquisition due diligence.
7
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MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
In 1998, the Company adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," which supersedes SOP 91-1 and is effective for transactions
entered into for fiscal years beginning after December 31, 1997. While some
principles remain the same, there are several key differences between the two
pronouncements, including accounting for multiple element arrangements. Under
SOP 97-2, the Company recognizes software license revenue when the following
criteria are met: (1) a signed and executed contract is obtained; (2) shipment
has occurred; (3) the license fee is fixed and determinable; (4) collection is
probable; and (5) remaining obligations under the license agreement are
immaterial. The Company sells and invoices software licenses and maintenance
fees as separate contract elements, except with respect to first year
maintenance for the Mestamed product which is sold in the form of a bundled
turnkey system. Prices net of discounts are separately identified at the time of
sale for each element. The Company has established vendor specific objective
evidence related to the value of maintenance fees. The Company uses the residual
value method to allocate Mestamed software revenue between licenses and first
year maintenance. The adoption of SOP 97-2 did not have a material impact on the
Company's financial statements.
Revenues are derived from the licensing and sub-licensing of software, the
sale of computer hardware, accessories and supplies, professional and technical
consulting services, implementation and training products and services, forms
and case plans, software maintenance and support services, outsourcing services,
as well as home health care management consulting services.
To the extent that software and services revenues result from software
support, implementation, training and technical consulting services, such
revenues are recognized monthly as the related services are rendered or, for
software support revenues, over the term of the related agreement. To the extent
that software and services revenues result from software licenses, computer
hardware and third-party software revenues, such revenues are recognized when
the related products are delivered and collectibility of fees is determined to
be probable, provided that no significant obligation remains under the contract.
Limited amounts of revenues derived from the sale of software licenses requiring
significant modification or customization are recorded based upon the percentage
of completion method using labor hours or contract milestones. Software support
or maintenance allows customers to receive unspecified enhancements and
regulatory data updates in addition to telephone support. Consulting services
revenues are recognized monthly as the related services are performed.
Revenues for post-contract customer support are recognized ratably over the
term of the support period, which is typically one year. Post contract customer
support fees typically cover incremental product enhancements, regulatory
updates and correction of software errors. Separate fees are charged for
significant product enhancements, new software modules, additional users, and
migrations to different operating system platforms.
Subsequent to system shipment, the Company frequently delivers a variety of
add-on software and hardware components. Revenues from these sales are
recognized upon shipment.
In addition to software licenses, software maintenance and support, and
related hardware, the Company also provides computer-based training, CD-ROMs and
a number of ancillary services including on site implementation and training,
classroom training, consulting and "premium" and after-hours support. Revenues
from such products and services are recognized monthly as such products are
delivered and such services are performed.
8
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Unbilled receivables typically represent revenues from ancillary services
performed and earned in the current period but not billed until subsequent
periods, usually within one month. Unearned revenues represent amounts billed
and included in accounts receivable for which revenue recognition has not yet
occurred.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in income for the period.
SOFTWARE DEVELOPMENT EXPENSES
SFAS No. 86 requires that software development costs incurred subsequent to
the establishment of technological feasibility for the product be capitalized.
The Company has no capitalized development costs as of September 30, 2000 except
those developed technologies capitalized in connection with the Simione/MCS
merger on March 7, 2000 as more fully described in Note 5.
CONCENTRATIONS AND MAJOR CUSTOMERS
The Company sells its systems and services to various companies in the
health care industry. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. Current operations are charged with an allowance for doubtful
accounts based upon experience and any unusual circumstances which affect the
collectibility of receivables. Amounts deemed uncollectible are charged against
this allowance.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
PURCHASED SOFTWARE, LEASEHOLD IMPROVEMENTS
Purchased Software and Leasehold Improvements are stated at cost.
Amortization is calculated for financial reporting purposes using the
straight-line method over the estimated useful lives (ranging from one to ten
years) of the assets or lease term, whichever is shorter.
INTANGIBLE ASSETS AND LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset's
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.
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The intangible assets, arising from the Simione/MCS merger, are amortized
using the straight-line method over the estimated useful lives of the related
assets as more fully disclosed in Note 5. The Company reviews its long-lived and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The measurement of
possible impairment is based upon determining whether projected undiscounted
future cash flow from the use of the asset is less than the carrying amount of
the asset.
INCOME TAXES
The Company accounts for income taxes using the asset/liability method
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax bases of assets and liabilities.
NET LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128
which 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 are very 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.
STOCK BASED COMPENSATION
Stock options are accounted for under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair value.
Notes payable: The carrying amounts of the Company's notes payable
approximates their fair value.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for the Company's first quarter of the fiscal year ending December 31,
2001. The Company's management does not believe that the adoption of SFAS No.
133 will have a material impact on the Company's financial position or results
of operations.
On December 3, 1999, the SEC released Staff Accounting Bulletin 101,
(SAB 101) "Revenue Recognition in Financial Statements". This bulletin
established more clearly defined revenue recognition criteria than previously
existing accounting pronouncements. On June 26, 2000, the SEC released SAB 101B,
which delayed the required implementation of SAB 101 until no later than the
fourth quarter of fiscal years ending December 31, 2000. The Company believes
that the effects of this bulletin will not be material to its financial
position, results of operations or cash flow.
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DISCONTINUED OPERATIONS
The discontinued operations reported in the Company's results of operations
for the nine months ended September 30, 1999 relate to MCS's Profitworks segment
which was distributed to MCS's parent company, Mestek Inc., its then parent
company, on September 1, 1999.
NOTE 2 - MERGER
On March 7, 2000, MCS completed the merger with Simione Central Holdings,
Inc. (Simione). Simione issued 1,489,853 shares of common stock to MCS
stockholders in exchange for all of the outstanding shares of MCS common stock.
This number of shares has been adjusted to reflect a one-for-five reverse stock
split that was completed by Simione immediately prior to the merger. In
connection with the closing of the merger, Mestek invested $6.0 million in
Simione in exchange for 5.6 million shares of Series B preferred stock and
warrants to purchase 400,000 shares (on a split adjusted basis) of Simione
common stock. Additional information on the merger is included in Simione's
Registration Statement on Form S-4 (Registration No. 333-96529).
Pro-forma unaudited results assuming the merger took place as of January 1,
1999, and further assuming that the acquisition of CareCentric by Simione on
August 12, 1999 took place on January 1, 1999, are as follows:
FOR NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
------------------- -------------------
2000 1999
------------------- -------------------
Net revenues $ 22,815,000 $ 34,228,000
Net (loss) $ (7,918,000) $ (8,173,000)
Net (loss) per share - basic $ (2.06) $ (2.12)
Net (loss) per share - diluted $ (2.06) $ (2.11)
NOTE 3 - INVENTORIES
Inventories consist principally of computer equipment held for resale and
related operating system licenses. Inventories are valued at the lower of cost
or market.
NOTE 4 - FURNITURE AND EQUIPMENT
Property and equipment consisted of the following:
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DEPRECIATION
SEPTEMBER 30, DECEMBER 31, ESTIMATED
2000 1999 USEFUL LIVES
--------------------- --------------------- --------------------
Furniture and Fixtures $ 1,533,000 $ 315,000 10 years
Computer equipment 5,996,000 1,483,000 5 years
--------------------- --------------------- -------------------
7,529,000 1,798,000
Accumulated depreciation (5,393,000) (878,000)
--------------------- ---------------------
$ 2,136,000 $ 920,000
===================== =====================
</TABLE>
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NOTE 5 - INTANGIBLE ASSETS
Intangible assets at September 30, 2000 consisted of the following:
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ACCUMULATED NET BOOK AMORTIZATION
COST AMORTIZATION VALUE PERIOD
----------------- -------------------- ------------------ ---------------------
Developed technology $10,650,000 $ (776,000) $ 9,874,000 8 years
Assembled workforce 2,300,000 (268,000) 2,032,000 5 years
Customer base 1,700,000 (110,000) 1,590,000 9 years
Goodwill 12,151,000 (1,013,000) 11,138,000 7 years
----------------- -------------------- ------------------
$26,801,000 $ (2,167,000) $ 24,634,000
================= ==================== ==================
</TABLE>
Amortization of the above intangible assets will reduce operating income
(or increase operating losses) by approximately $3.1 million in the year 2000.
NOTE 6 - INCOME TAXES
At December 31, 1999, Simione Central Holdings, Inc. had approximately
$15.3 million of net operating losses for income tax purposes available to
offset future taxable income. Such losses expire beginning in 2010 and may be
subject to certain limitations arising from the change in ownership in
connection with the Simione/MCS merger on March 7, 2000. A valuation allowance
reducing the net deferred tax assets to zero has been recorded based on
management's assessment that it is "more likely than not" that this net asset is
not realizable as of September 30, 2000.
The Company's actual income tax expense (benefit) for the three months
ended September 30, 2000 differs from the "expected" amount (computed by
applying the U.S. Federal corporate income tax rate of 35% to the loss before
income taxes) due to the fact that the portion of the loss arising after March
7, 2000, the date of the Simione/MCS merger, cannot be assured of generating a
federal income tax benefit in the future.
NOTE 7 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
SHORT TERM:
Line of Credit $ 4,598,000
Note Payable - Mestek 600,000 $ -
=============== ================
LONG TERM:
Convertible Note Payable -
Barrett C. O'Donnell $ 600,000 $ -
=============== ================
12
<PAGE>
Line of Credit:
On July 12, 2000, the Company entered into a $6.0 million Loan and Security
Agreement facility (the Wainwright Facility) with Wainwright Bank and Trust
Company, a commercial bank, under which the Company granted a first priority
position on substantially all of its assets as security. The Wainwright Facility
was used to pay off the Line of Credit with Silicon Valley Bank, certain short
term loans from Mestek, Inc., and a loan from David O. Ellis, as more fully
described below in Note 7. Borrowings under the Wainwright Facility accrue
interest, at the bank's prime rate per annum, require monthly payments of
interest and mature on July 12, 2001. The Company's obligations under the
Wainwright Facility are guaranteed by Mestek, Inc. in consideration of which the
Company has issued a warrant to Mestek, Inc. to purchase 104,712 shares of the
Company's common stock as more fully explained in Note 10 to these Financial
Statements.
Convertible Note Payable - Barrett C. O'Donnell:
On November 11, 1999, Simione borrowed $500,000 from Barrett C. O'Donnell
and $250,000 from David O. Ellis, both on an unsecured basis, and executed
promissory notes in connection therewith. Dr. Ellis and Mr. O'Donnell are
directors of the Company. When the Simione/MCS merger was completed on March 7,
2000, the Company succeeded to both of these obligations. The note payable to
Dr. Ellis, which accrued interest at 9% per annum, was paid in full on July 12,
2000 in advance of its August 15, 2000 maturity. The note payable to Mr.
O'Donnell included interest at 9% per annum, was scheduled to mature on May 11,
2002, and required quarterly payment of accrued interest. On August 8, 2000, the
$500,000 note payable to Mr. O'Donnell, together with $100,000 of deferred
salary, was cancelled in exchange for a $600,000 subordinated note, convertible
into Common Stock at a strike price of $2.51 per share, with interest at 9% per
annum and a five-year maturity.
Note Payable - Mestek:
The Company is obligated under a one year unsecured promissory note in the
principal amount of $600,000 payable to Mestek Inc. which bears interest at
prime with interest payable semiannually and which matures on July 30, 2001.
This note covers funds advanced by Mestek to Simione to cover payroll and
accounts payable obligations incurred by the Company during the period of its
transition of senior lenders from Silicon Valley Bank to Wainwright Bank and
Trust Company.
J.E. Reed facility:
On June 22, 2000, the Company entered into a new financing facility (the J.
E. Reed Facility) provided by John E. Reed, a Simione director and the Chairman
and Chief Executive Officer of Mestek, Inc. The J. E. Reed Facility consists of
a $6.0 million subordinated revolving line of credit, convertible into Common
Stock of the Company at a strike price of $2.51 per share, with interest at 9%
per annum and a five-year maturity. The J. E. Reed Facility can be drawn down by
the Company as needed in $500,000 increments and is secured by a second position
on substantially all of the Company's assets. No borrowings were outstanding
under the J. E. Reed Facility as of September 30, 2000.
The Company is obligated under a number of capital lease obligations
originally entered into by Simione related to computer equipment formerly used
in Simione's business.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal and regulatory proceedings arising
in the normal course of business which management believes will not have a
material adverse effect on its financial position or results of operations.
The Company reached a settlement on June 30, 2000 with IBM relative to the
early cancellation of the Company's service agreement with IBM for services
provided to a former customer of a subsidiary of Simione Central Holdings, Inc.,
and related fees for services. The settlement was fully reserved for in
connection with the accounting for the Simione/MCS merger on March 7, 2000 and,
accordingly, did not have a material adverse impact upon the Company's financial
condition or results of operations.
13
<PAGE>
NOTE 9 - SEGMENT RESULTS
The Company has two reportable segments: product related and consulting.
The Company's product related segment sells comprehensive and flexible software
solutions and services to enable home health care providers to more effectively
operate their businesses and compete in prospective payment (PPS) and managed
care environments. The consulting segment assists home health care providers in
addressing the challenges of reducing costs, maintaining quality, streamlining
operations and re-engineering organizational structures, as well as assisting
with regulatory compliance and assisting with merger and acquisition due
diligence.
The Company evaluates performance and allocates resources based on profit
or loss from operations, not including gains and losses on the Company's
investment portfolio. The accounting policies of the reportable segments are the
same as those used for the consolidated financial statements. The revenues,
operating losses and assets of the Company include the operations of Simione
from March 7, 2000 to September 30, 2000, the operations of MCS for the full
nine months ended September 30, 2000, and the operations of MCS only for the
three month and nine month periods ended September 30, 1999 as more fully
explained in Note 1. Accordingly, because Simione's 1999 results from operations
are not included, comparability between 1999 and 2000 figures is adversely
affected. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of revenue and results of operations on a
"comparable" basis. The revenues, operating losses and assets of the Company by
business segment are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- --------------------------------------------
2000 1999 2000 1999
-------------------- --------------------- -------------------- ---------------------
Revenues
Product related $ 7,334,000 $ 3,797,000 $ 16,102,000 $ 12,519,000
Consulting 1,213,000 2,703,000
- -
-------------------- --------------------- -------------------- ---------------------
Total $ 8,547,000 $ 3,797,000 $ 18,805,000 $ 12,519,000
==================== ===================== ==================== =====================
Cost of sales
Product related $ 2,620,000 $ 2,339,000 $ 7,670,000 $ 7,669,000
Consulting 1,136,000 2,588,000
- -
-------------------- --------------------- -------------------- ---------------------
Total $ 3,756,000 $ 2,339,000 $ 10,258,000 $ 7,669,000
==================== ===================== ==================== =====================
Research and development
Product Related $ 1,897,000 $ 300,000 $ 4,388,000 $ 831,000
==================== ===================== ==================== =====================
Depreciation and amortization
Product related $ 1,028,000 $ 57,000 $ 2,457,000 $ 170,000
Consulting 143,000 - 323,000
-------------------- --------------------- -------------------- ---------------------
Total $ 1,171,000 $ 57,000 $ 2,780,000 $ 170,000
==================== ===================== ==================== =====================
Net income (loss) before
taxes from continuing operations
Product related $ (1,868,000) $ 128,000 $(6,401,000) $ 725,000
Consulting 30,000 - (273,000) -
-------------------- --------------------- -------------------- ---------------------
Total $ (1,838,000) $ 128,000 $(6,674,000) $ 725,000
==================== ===================== ==================== =====================
September 30, December 31,
2000 1999
--------------------- --------------------
Assets
Product related $ 33,355,000 $ 6,696,000
Consulting 4,615,000 -
--------------------- --------------------
Total $ 37,970,000 $ 6,696,000
===================== ====================
</TABLE>
The Net Income (loss) from continuing operations reported above has been
affected by non-cash depreciation and amortization charges as reported above.
14
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY
Subsequent to the Simione/MCS Merger on March 7, 2000, the Company's
Shareholders' Equity (all on a split adjusted basis) is comprised of the
following:
Common Shares - 20,000,000 shares authorized, $.001 par value, 3,849,816
shares issued and outstanding. 1,489,853 of such shares were issued on March 7,
2000 to the former MCS common shareholders. 606,904 of such shares were issued
on March 7, 2000 to the former holders of Simione Central Holdings, Inc. Series
A Preferred Stock, which shares were converted into Simione common shares in
connection with the merger. If the value of the Company's common stock does not
equal $15.00 per share on or prior to December 31, 2000, the Company is required
to issue up to an additional 606,904 shares of common stock to the former
holders of the Series A Preferred Stock or, alternatively, at the discretion of
the Company, to pay cash or a combination of cash and common stock to such
former holders of the Series A Preferred Stock under a formula set forth in the
CareCentric/Simione merger agreement.
Preferred Stock-10,000,000 shares authorized
Series B Preferred Stock -$.001 par value, 5,600,000 shares issued. The
shares of Series B Preferred Stock are held by Mestek, Inc. (Mestek) and were
issued in consideration of $6,000,000 paid to Simione Central Holdings, Inc. on
March 7, 2000, in the form of cash and debt forgiveness. The Series B Preferred
shares, as originally issued, carried 2,240,000 common share votes (on a split
adjusted basis) and were entitled to a 9% cumulative dividend, among other
rights which are described in greater detail in Appendix B to the Simione
Central Holdings, Inc.-MCS, Inc. Joint Proxy Statement issued pursuant to the
merger. In connection with the Company's application for listing on the NASDAQ
SmallCap Market, the Company reached an agreement with Mestek on June 12, 2000
under which Mestek agreed to allow the aforementioned number of common share
votes to be reduced to 1,120,000 in consideration for the issuance by the
Company to Mestek of a warrant to acquire up to 490,396 shares of Simione common
stock, as more fully described below.
Series C Preferred Stock - $.001 par value, 850,000 shares issued. The
shares of Series C Preferred Stock are held by Mestek, Inc. and result from the
conversion of a pre-existing $850,000 convertible note payable to Mestek, Inc.
The Series C Preferred shares carry 170,000 common share votes (on a split
adjusted basis) and are entitled to an 11% cumulative dividend, among other
rights which are described in greater detail in Appendix F to the Simione
Central Holdings, Inc.-Mestek, Inc. Joint Proxy Statement issued in connection
with the merger.
Series D Preferred Stock - $.001 par value, 398,406 shares issued. The
shares of Series D Preferred Stock are held by John E. Reed and were issued on
June 12, 2000 in consideration of $1.0 million paid to the Company in cash. The
Series D Preferred shares are entitled to other rights which are described in
greater detail in the Certificate of Designations, Preferences and Rights of the
Series D Preferred Stock of Simione included in Simione's Restated Certificate
of Incorporation, which was filed as an exhibit to Simione's Form 10-Q for the
period ended June 30, 2000.
Common Stock Warrants - In connection with the issuance of the Series B
Preferred Stock described above, Mestek, Inc. received a warrant to acquire up
to 400,000 shares of the Company's common stock at a per share exercise price
equal to $10.875. In connection with the waiver by Mestek, Inc. of certain
voting rights previously granted to it, Mestek, Inc. received on June 12, 2000 a
warrant to acquire up to 490,396 shares of the Company's common stock for a term
of 3 years at a per share exercise price equal to $3.21. In connection with
Mestek's guarantee of the Company's obligations under the line of credit from
Wainwright Bank and Trust Company, as more fully explained in Note 7 to these
Financial statements, Mestek, Inc. received on July 12, 2000 a warrant to
acquire up to 104,712 shares of the Company's common stock for a term of 3 years
at a per share exercise price equal to $2.51. The aforementioned shares and per
share prices are all on a split adjusted basis.
Stock Options - The Company has established several stock option plans,
under which the Company has granted options to purchase an aggregate of 350,136
shares (on a split adjusted basis) of common stock as of October 26, 2000.
15
<PAGE>
Options granted under Simione's 1997 Omnibus Equity-based Incentive Plan must
have an exercise price not less than the fair market value at the date of grant.
Of the options granted, 56,885 were exercised prior to December 31, 1999 and
5,228 have been cancelled as of October 26, 2000. Of the remaining 288,023
options, 288,010 are vested as of October 26, 2000 and 226,257 are exercisable
as of that date. The exercise prices range from $7.50 to $55.75 per share, both
on a split adjusted basis.
In connection with the Simione/MCS merger on March 7, 2000, Mestek was
granted a series of options to purchase a total of approximately 378,295 shares
of the Company's common stock (on a split adjusted basis). These options are
exercisable only to the extent that outstanding Simione options, warrants or
other conversion rights are exercised. These options were designed to prevent
dilution of Mestek, Inc.'s ownership interest in the Company after the merger.
As options, warrants and other common rights are cancelled, Mestek's option
rights are correspondingly reduced.
NOTE 11 - RELATED PARTY TRANSACTIONS
A shareholder and executive officer of the Company is a partner in an
entity that leases an office facility to the Company under an operating lease
that expires in December 2002. Annual rental payments under this lease are
approximately $136,000 per year through 2002.
The Company has subleased certain space to Healthfield, Inc. which has a
significant shareholder who was a former member of the board of directors of the
Company.
Certain relatives of William Simione, Jr. and Robert Simione manage a
certified public accounting business which performs services for the Company in
conjunction with services performed for customers of Simione.
R. Bruce Dewey remains a Senior Vice President of Mestek while performing
his duties as Chief Executive Officer, President and director of the Company.
Stephen M. Shea remains Senior Vice President and Chief Financial Officer
of Mestek, Inc. while performing his duties as Chief Financial Officer of the
Company.
As of September 30, 2000, the Company had one promissory note outstanding
to a director. The note is described in Note 7 to these Financial Statements.
John E. Reed is a director and a significant, but not controlling,
shareholder of the Wainwright Bank and Trust Company which has provided the
Company with a $6.0 million line of credit, as more fully explained in Note 7 to
the Financial Statements.
John E. Reed, Chairman of the Company and Chairman and Chief Executive
Officer of Mestek, Inc., has provided the Company with a $6.0 million line of
credit (unrelated to the Wainwright Bank and Trust $6.0 million line of credit
described above) as more fully described in Note 7 to the Financial Statements
and has also purchased $1.0 million of the Company's Series D Preferred Stock on
June 12, 2000, as more fully described in Note 10 to these Financial Statements.
An independent committee of the Company's Board of Directors, consisting of
Barrett C. O'Donnell and David O. Ellis, negotiated the terms of Mr. Reed's debt
and equity investments in the Company. The issuance of 398,406 shares of Series
D Preferred Stock to Mr. Reed for his $1.0 million equity investment was based
on a per share price of $2.51, which was the 5-day average closing price of
Simione common stock as of the date of the final negotiation of the terms of Mr.
Reed's purchase. The conversion price for Mr. Reed's $6.0 million loan, which
converts into Simione common stock as described in more detail in Note 7 to
these Financial Statements, is also $2.51 per share.
Warrants were granted in June 2000 and July 2000 by the Company to Mestek,
Inc. in connection with its waiver of certain voting rights previously granted
to it and in connection with its guarantee of the loan from Wainwright Bank and
Trust Company to the Company. The terms of the warrants (as described in more
detail in Note 10 to these Financial Statements) were based on negotiations by
independent committees of the Boards of Directors of the Company and Mestek.
16
<PAGE>
NOTE 12 - LICENSE AGREEMENTS
The Company licenses certain software products from third parties for
incorporation in, or other use with, its products and is obligated to pay
license fees in connection with such products. The Company sublicenses such
products to its customers and collects fees in connection with such
sublicensees.
17
<PAGE>
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 Exchange 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. The Company's
future financial performance could differ significantly from that set forth
herein, and from the expectations of management. Important factors that could
cause the Company's financial performance to differ materially from past results
and from those expressed in any forward looking statements include, without
limitation, the inability to obtain additional capital resources, variability in
quarterly operating results, customer concentration, product acceptance, long
sales cycles, long and varying delivery cycles, the Company's dependence on
business partners, emerging technological standards, changing regulatory
standards, inability to retain or hire experienced and knowledgeable employees,
risks associated with acquisitions, and the risk factors detailed in the
Company's Registration Statement on Form S-4 (File No. 333-96529) and in the
Company's periodic reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has recently secured $13.0 million in new debt and equity
capital as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SOURCE FUNDING FORM DATE CLOSED
------------------------------------ ------------------------- ---------------------------- ----------------------
John E. Reed $ 1,000,000 Series D Preferred Stock June 22, 2000
John E. Reed 6,000,000 Line of Credit June 22, 2000
Wainwright Bank and Trust Company 6,000,000 Line of Credit July 12, 2000
-------------------------
$ 13,000,000
=========================
</TABLE>
Detail on these three transactions are described in greater detail in Notes 7
and 10 to the accompanying Financial Statements.
The Wainwright Bank and Trust Company Line of Credit was used to pay off
the Silicon Valley Bank Line of Credit, certain short term loans from Mestek
Inc., and the note payable to David O. Ellis. As of October 20, 2000, the unused
capacity under the John E. Reed and Wainwright Bank and Trust Company lines of
credit are $6,000,000 and $1,402,000, respectively.
The Company believes that the above funding sources will provide sufficient
capital to meet its working capital needs in the year 2000 as well as fund
planned product development initiatives during this period.
The Company's operating earnings for the three months ended September 30,
2000, after adding back non cash charges (amortization and depreciation) and
discretionary spending on research and development, was $1,529,000, computed as
follows:
(Loss) Income from operations $ (1,539,000)
Amortization and depreciation
1,171,000
Research and development
1,897,000
--------------------------
$ 1,529,000
==========================
18
<PAGE>
BACKGROUND
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 the prospective payment (PPS) and managed care
environments. 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. 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 sells its software 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 shipped and the
collectibility of fees is probable, provided that no significant obligations
remain under the contract that affect the acceptance of the products. Revenues
derived from the sale of software products requiring significant modification or
customization are recognized based upon the percentage of completion method
using labor hours or contract milestones. The price of the Company's software
varies depending on the number of software modules licensed and the number of
users accessing the system and can range from under 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, for certain products, some
additional payments prior to delivery. As a result, the Company's balance sheet
reflects significant customer deposits.
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 believes that continued enhancement of its software systems is
critical to its future success, and anticipates that investment in existing and
new products will continue as needed to support the Company's product
strategies. 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. For the nine
months ended September 30, 2000 and 1999, the Company did not capitalize any
computer software development costs.
BACKLOG
The Company had backlog associated with its software of approximately $4.2
million and $1.8 million on September 30, 2000 and December 31, 1999,
respectively, including in both cases the products of MCS and Simione. The
backlog at September 30, 2000 includes approximately $2.4 million in new orders
for software systems booked in the three month period ended September 30, 2000.
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,
although system orders are typically installed within 16 weeks of the date that
the initial deposit is received. 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.
19
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Revenues. Total net revenues for the three months ended September 30, 2000
were $8,547,000, an increase of 125.1% relative to the three months ended
September 30, 1999. The financial statements for September 30, 1999, however,
include only the operations of MCS. If the historical operations of Simione,
CareCentric Solutions, Inc., (which Simione acquired on August 12, 1999) and MCS
were arithmetically combined for the three month period ended September 30,
1999, revenues (exclusive of Simione's outsourcing segment which was
discontinued prior to the end of 1999) for the three months ended September 30,
1999 would have been $8,954,000. Comparable revenues for the three months ended
September 30, 2000, therefore, were reduced $407,000 or 4.5%, principally due to
a decline in home health consulting revenues. The home health consulting
segment's revenue in 1999 included several large engagements which have not been
replaced with comparable engagements in 2000. The Company believes that the
market for home health consulting services and home health business software has
been adversely effected by cutbacks in Medicare reimbursement rates originally
enacted via amendments to the Balanced Budget Act of 1997 and related
regulations.
The Company believes it has made significant progress in strengthening its
franchise by re-affirming its commitment to the continued development and
support of its core products, strengthening its customer support staff, and
securing substantial new capital commitments which are described in detail in
Notes 7 and 10 to the accompanying Financial Statements.
The Company's operating loss from continuing operations, reflecting the
same assumptions as above for purposes of comparability, decreased from
($4,368,000) in the third quarter of 1999 to ($1,845,000) in the third quarter
of 2000. Management believes this reduced operating loss is traceable
principally to the effect of the cost saving initiatives which the Company
undertook after the consummation of the merger on March 7, 2000. The Company's
Dezine and Mestamed product support groups have been largely consolidated in
Pittsburgh. The Company's executive, general and administrative, financial and
human resources functions have been consolidated in Atlanta, Georgia. Offices in
San Diego, Dallas, Jacksonville and Huntington Beach have been closed, and
offices in Houston and New Jersey have been significantly down-sized. Two of the
three floors at the Company headquarters in Atlanta and one of two floors at the
facility in Pompano Beach have been sublet.
Research and development expenses, however, increased, on a comparable
basis, from $1,230,000 to $1,898,000.
Other Income (Expense). Interest expense for the three months ended September
30, 2000 relates primarily to borrowings under the Company's line of credit
agreement and capital lease obligations. The Company was a wholly owned
subsidiary of Mestek, Inc. during the quarter ended September 30, 1999 and
accordingly reported no interest expense during this period. The Company expects
its interest expense to increase during the remainder of 2000 due to increased
borrowings. The impact of recent increases in the prime lending rate will likely
be offset by the reduced cost of funds under the Wainwright Bank and Trust Line
of Credit, which will be approximately 200 basis points (2 percent) below the
rate formerly incurred under the prior credit line.
20
<PAGE>
Income Taxes. At December 31, 1999, Simione Central Holdings Inc. (Simione) had
net operating loss ("NOL") carryforwards for federal and state income tax
purposes of $15.3 million, which will expire at various dates beginning in 2010,
if not utilized. Simione also has research and development and alternative
minimum tax credits of approximately $90,000 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 subsequent to
the Simione/MCS merger on March 7, 2000. The Company has concluded that it is
more likely than not that these NOLs and tax credit carryforwards will not be
realized based on a weighing of evidence at September 30, 2000, and as a result,
a 100% deferred tax valuation allowance has been recorded against these assets.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Revenues. Total net revenues for the nine months ended September 30, 2000
were $18,805,000, an increase of 50.2% relative to the nine months ended
September 30, 1999. Results of operations for the nine months ended September
30, 2000 include the operations of Simione from March 7, 2000 to September 30,
2000, and the operations of MCS for the full nine months. The financial
statements for the nine months ended September 30, 1999 include only the
operations of MCS. If the historical operations of Simione, CareCentric
Solutions, Inc. (which Simione acquired on August 12, 1999) and MCS were
arithmetically combined for the nine month periods ended September 30, 2000 and
1999, revenues (exclusive of Simione's outsourcing segment which was
discontinued prior to the end of 1999) would have been $22,173,000 for the nine
months ended September 30, 2000 and $30,516,000 for the nine months ended
September 30, 1999. The reduced revenues are attributable principally to reduced
bookings of software and equipment sales in the final quarter of 1999 and the
first half of year 2000. The Company believes this resulted from adverse
economic conditions in the healthcare marketplace, uncertainties related to the
Simione/MCS merger, and customer concerns related to year 2000 functionality.
The reduction in comparable sales revenue is traceable more specifically to a
drop in Mestamed (MCS) revenue of approximately $4,145,000, a drop in STAT
(Simione) revenue of approximately $1,672,000, a drop in Dezine (Simione)
revenue of approximately $962,000 and a drop in home health consulting revenue
of approximately $1,222,000. The Company believes that the market for home
health consulting services and home health business software has been adversely
effected by cutbacks in Medicare reimbursement rates originally enacted via
amendments to the Balanced Budget Act of 1997 and related regulations.
The Company's operating loss from continuing operations, reflecting the same
assumptions as above for purposes of comparability, decreased from ($10,631,000)
for the nine months ended September 30, 1999 to ($6,999,000) for the nine months
ended September 30, 2000. Management believes this reduced operating loss,
despite significant reduced revenue on a comparable basis, is attributable,
principally to the cost savings initiatives the Company has undertaken
subsequent to the Simione/MCS merger on March 7, 2000.
Other Income (Expense). Interest expense for the nine months ended September 30,
2000 relates primarily to borrowings under the Company's line of credit
agreement and capital lease obligations. The Company was a wholly owned
subsidiary of Mestek, Inc. during the nine months ended September 30, 1999 and
accordingly reported no interest expense during this period. The Company expects
its interest expense to increase during the remainder of 2000 due to increased
borrowings. The impact of recent increases in the prime lending rate will likely
be offset by the reduced cost of funds under the Wainwright Bank and Trust Line
of Credit, which will be approximately 200 basis points (2 percent) below the
rate formerly incurred under the prior credit line.
Income Taxes. At December 31, 1999, Simione Central Holdings Inc. (Simione) had
net operating loss ("NOL") carryforwards for federal and state income tax
purposes of $15.3 million, which will expire at various dates beginning in 2010,
if not utilized. Simione also has research and development and alternative
minimum tax credits ("tax credits") of approximately $90,000 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
subsequent to the Simione/MCS merger on March 7, 2000. The Company has concluded
21
<PAGE>
that it is more likely than not that these NOLs and tax credit carryforwards
will not be realized based on a weighing of evidence at September 30, 2000, and
as a result, a 100% deferred tax valuation allowance has been recorded against
these assets.
IMPACT OF NEW ACCOUNTING STANDARDS
In 1998, the Financial and Accounting Standards Board issued SFAS No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for the Company's fiscal year ending
December 31, 2001. The Company's management does not believe that the adoption
of SFAS No. 133 will have a material impact on the Company's position or results
of operations.
On December 3, 1999, the SEC released Staff Accounting Bulletin 101,
(SAB 101) "Revenue Recognition in Financial Statements". This bulletin
established more clearly defined revenue recognition criteria than previously
existing accounting pronouncements. On June 26, 2000, the SEC released SAB 101B,
which delayed the required implementation of SAB 101 until no later than the
fourth quarter of fiscal years ending December 31, 2000. The Company believes
that the effects of this bulletin will not be material to its financial
position, results of operations or cash flow.
22
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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.
Simione was one of several defendants named in a "whistleblower" lawsuit related
to alleged Medicare fraud filed under the False Claims Act in the Northern
District of Georgia (U.S. ex rel. McLendon v. Columbia/HCA Healthcare Corp., et
al., No. 97-VC-0890 (N.D. Ga.)). The lawsuit involves claims that Simione
allegedly participated in a conspiracy with Columbia/HCA and other third parties
to bill inflated and fraudulent claims to Medicare. The Company has learned that
the Justice Department has elected not to join in the claims asserted against
Simione by Donald McLendon, who is a former employee of an unrelated service
provider to Columbia/HCA. Although the Justice Department joined the suit with
regard to other defendants, it specifically declined to intervene with regard to
Simione. In late 1999, the Company received an indication from Mr. McLendon's
attorney that notwithstanding the declination by the Justice Department, Mr.
McLendon might elect to pursue "whistleblower" claims against the Company
directly. There has been no further contact from Mr. McLendon's attorneys since
that time, however. In the meantime, in May 2000, Columbia/HCA announced a
tentative settlement with the Justice Department with respect to the McLendon
claim, among others. It is not clear what effect, if any, this settlement might
have with regard to any potential claim by Mr. McLendon against the Company. In
any event, the Company does not believe that any of these claims, if asserted
against the Company, will have any material effect on the Company's overall
business or financial condition. Should these claims be asserted, moreover,
Simione intends to vigorously defend against them.
The Company reached a settlement on June 30, 2000 with IBM relative to the
early cancellation of the Company's service agreement with IBM for services
provided to a former customer of Simione Central Holdings, Inc., and related
fees for services. The settlement was fully reserved for in connection with the
accounting for the Simione/MCS merger on March 7, 2000 and, accordingly, did not
have a material adverse impact upon the Company's financial condition or results
of operations.
Item 2. Change in Securities.
In June 2000, in connection with John E. Reed's investment in the Company,
the Company issued 398,406 shares of Simione Series D Preferred Stock to Mr.
Reed for an aggregate purchase price of $1.0 million. The Series D Preferred
Stock is convertible into common stock at an initial conversion price of $2.51
per share, subject to antidilution adjustments for stock splits, stock dividend
or reclassifications. In connection with Mestek, Inc.'s waiver of certain voting
rights with respect to the ownership of Simione Series B Preferred Stock, the
Company issued a warrant to Mestek in June 2000 to purchase 490,396 shares of
the Company's common stock at an exercise price of $3.21 per share. In July
2000, the Company issued to Mestek a warrant to purchase 104,712 shares of the
Company's common stock in connection with Mestek's guarantee of the loan from
Wainwright Bank and Trust Company to the Company at an exercise price of $2.51
per share. In issuing the warrants and shares without registration, the Company
relied on the exemption from registration provided in Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On August 8, 2000 the Annual Meeting of Stockholders of Simione Central
Holdings, Inc. was held. Stockholders present in person or by proxy representing
4,852,298 shares of common stock and Preferred stock were represented at the
meeting.
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Seven Directors of the Company were duly elected to hold office until the
next Annual Meeting of Stockholders or until successors have been duly elected.
The elected Directors and the affirmative votes were as follows:
VOTES AGAINST
NAME AFFIRMATIVE VOTES OR WITHHELD
---- ----------------- -----------
R. Bruce Dewey 4,839,689 907
Barrett C. O'Donnell 4,835,284 5,312
Winston R. Hindle, Jr. 4,839,704 892
Dr. David O. Ellis 4,839,731 865
John E. Reed 4,839,686 910
Jesse I. Treu 4,839,842 754
Edward K. Wissing 4,839,704 892
- approval to appoint Grant Thornton LLP as the Company's auditors for
December 31, 2000
The affirmative votes for this matter was as follows:
AFFIRMATIVE VOTES VOTES
VOTES AGAINST ABSTAINED
----- ------- ---------
Appoint Grant Thornton LLP 4,843,287 4,000 5,010
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
----------- -----------
10.1*Loan and Security Agreement by and between the Company, Simione
Central National, LLC, Simione Central Consulting, Inc. and
Wainwright Bank and Trust Company, dated July 10, 2000.
10.7** Warrant dated July 12, 2000 by and between the Company and
Mestek, Inc.
10.8** Restated Certificate of Incorporation of Simione Central
Holdings Inc. filed with the Secretary of State of Delaware on
August 11, 2000
27.1* Financial Data Schedule (for SEC use only).
-----------------------------
* Filed herewith.
** Incorporated by reference to the exhibit of the same number
filed with the Company's Form 10-Q for the quarter ended
June 30, 2000 (File No. 000-22162)
(b) Reports on Form 8-K:
24
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The Company filed a Report on Form 8-K on July 12, 2000 reporting on the
closing of the debt financing provided for the Company by Wainwright Bank
and Trust Company.
25
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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, 2000 By: /s/ Steve Shea
------------------------------------
STEVE SHEA
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
26
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1*Loan and Security Agreement by and between the Company, Simione Central,
LLC, Simione Central Consulting, Inc. and Wainwright Bank and Trust
Company, dated July 10, 2000.
10.7** Warrant dated July 12, 2000 by and between the Company and Mestek, Inc.
10.8** Restated Certificate of Incorporation of Simione Central Holdings Inc.
filed with the Secretary of State of
Delaware on August 11, 2000
27.1* Financial Data Schedule (for SEC use only).
-----------------------------
*Filed herewith.
**Incorporated by reference to the exhibit of the same number filed with the
Company's Form 10-Q for the quarter ended June 30, 2000 (File No. 000-22162)
27
