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 JUNE 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 7/31/2000
----- ---------
COMMON STOCK, $.001 PAR VALUE 3,849,816 SHARES
<PAGE>
SIMIONE CENTRAL HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2000 (unaudited) and December
31, 1999 (audited).
Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 2000 and 1999 (unaudited).
Consolidated Statements of Shareholders' Equity - Six Months Ended
June 30, 2000 (unaudited).
Consolidated Statements of Cash Flows - Three Months and Six Months
Ended June 30, 2000 and 1999 (unaudited).
Notes to Consolidated Financial Statements - June 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
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2
<PAGE>
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, DECEMBER 31,
--------------- -----------------
2000 1999
--------------- -----------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,999,000 $ 47,000
Accounts receivable, net of allowance
for doubtful accounts of $518,000 and
and $166,000 respectively 8,610,000 4,329,000
Prepaid expenses and other current assets 845,000 273,000
--------------- -----------------
Total current assets 11,454,000 4,649,000
Purchased software, furniture and equipment,
net 2,241,000 920,000
Intangible assets, net 25,563,000 -
Other assets 293,000 1,127,000
--------------- -----------------
Total assets $ 39,551,000 $ 6,696,000
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,413,000 $ -
Notes Payable 1,900,000 -
Accounts payable 2,294,000 1,137,000
Accrued compensation expense 621,000 393,000
Accrued liabilities 6,901,000 1,334,000
Customer deposits 2,367,000 419,000
Unearned revenues 5,887,000 2,908,000
--------------- -----------------
Total current liabilities 21,383,000 6,191,000
Accrued liabilities, less current portion 1,021,000 -
Notes payable long-term 500,000 -
Commitments and contingencies
Shareholders' equity:
Preferred Stock; 10,000,000 shares authorized
Series B Preferred, $.001 par value;
5,600,000 issued and outstanding 5,000 -
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
June 30, 2000
1,490,000 shares issued and outstanding at
December 31, 1999 4,000 1,000
Additional paid-in capital 21,071,000 1,260,000
Stock warrants 1,000,000 -
Accumulated deficit (5,434,000) (756,000)
--------------- -----------------
Total shareholders' equity 16,647,000 505,000
--------------- -----------------
Total liabilities and shareholders'equity $ 39,551,000 $ 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.
3
<PAGE>
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- ---------------- ---------------
Net revenues: $6,257,000 $ 4,682,000 $ 10,258,000 $ 8,722,000
Costs and expenses:
Cost of revenues
3,954,000 2,923,000 6,501,000 5,330,000
Selling, general and administrative 2,807,000 1,114,000 4,259,000 2,167,000
Research and development 1,780,000 135,000 2,491,000 531,000
Amortization and depreciation 1,183,000 56,000 1,610,000 113,000
--------------- --------------- ---------------- ---------------
Total costs and expenses 9,724,000 4,228,000 14,861,000 8,141,000
--------------- --------------- ---------------- ---------------
(Loss) income from operations (3,467,000) 454,000 (4,603,000) 581,000
Other (expense) income:
Other (expense) income - - (6,000) -
Interest expense (189,000) - (266,000) -
Interest and other income 28,000 6,000 40,000 15,000
--------------- --------------- ---------------- ---------------
Net (loss) income before taxes (3,628,000) 460,000 (4,835,000) 596,000
--------------- --------------- ---------------- ---------------
Income tax benefit (expense) - (178,000) 157,000 (231,000)
--------------- --------------- ---------------- ---------------
Net (loss) income from continuing
operations (3,628,000) 282,000 (4,678,000) 365,000
--------------- --------------- ================= ===============
Discontinued operation
Income from operations of discontinued
segment before taxes - 69,000 - 197,000
Applicable tax expense - 27,000 - 77,000
Net income from operations of discontinued --------------- --------------- ---------------- ---------------
segment - 42,000 - 120,000
--------------- --------------- ---------------- ---------------
Net (loss) income $(3,628,000) $ 324,000 $ (4,678,000) $ 485,000
=============== =============== ================ ===============
Net (loss) income per share - basic and
diluted
From continuing operations $ (0.94) $ 0.19 $ (1.57) $ 0.24
=============== =============== ================ ===============
Weighted average common shares -
basic and diluted 3,850,000 1,490,000 2,983,000 1,490,000
=============== =============== ================ ===============
Net (loss) income per share - basic and
diluted
From discontinued operations $ - $ 0.03 $ - $ 0.08
=============== =============== ================ ===============
Weighted average common shares -
basic and diluted 3,850,000 1,490,000 2,983,000 1,490,000
=============== =============== ================ ===============
Net (loss) income per share - basic and
diluted
From discontinued operations $ (0.94) $ 0.22 $ (1.57) $ 0.33
=============== =============== ================ ===============
Weighted average common shares -
Basic and diluted 3,850,000 1,490,000 2,983,000 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.
4
<PAGE>
<TABLE>
<CAPTION>
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Preferred Additional Total
----------------- ------------------- Paid-In Accumulated Shareholders'
Shares Stock Shares Stock Capital Warrants Deficit Equity
----------------- ------------------- ----------- ----------- -------------- --------------
Balance at December 31, $1,000 $ - $ 1,260,000 $ (756,000) $ 505,000
1999 1,000 -
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 - - 19,811,000 1,000,000 20,815,000
Issuance of $.001 par value
preferred stock in connection
with merger - - 6,450,000 6,000 - 6,000
Series B, 5,600,000 shares
Series C, 850,000 shares
Series D, 398,000 shares
-
Net loss
- - - - - - (4,678,000) (4,678,000)
---------- ---------- ----------- ---------- ----------- ----------- ------------ -------------
Balance at June 30, 2000 3,850,000 $4,000 6,450,000 $6,000 $21,071,000 $1,000,000 $(5,434,000) $16,647,000
========== ========== =========== ========== =========== =========== ============ =============
</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.
5
<PAGE>
SIMIONE CENTRAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,678,000) $485,000
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Provision for doubtful accounts 352,000 -
Amortization and depreciation 1,610,000 113,000
CHANGES IN ASSETS AND LIABILITIES, NET OF
ACQUISITIONS:
Accounts receivable (870,000) (387,000)
Prepaid expenses and other current assets 15,000 (30,000)
Other assets (136,000) -
Accounts payable (873,000) (147,000)
Accrued compensation expense (82,000) (284,000)
Accrued liabilities (683,000) 551,000
Customer deposits 819,000 (128,000)
Unearned revenues 1,612,000 38,000
---------------- --------------
Net cash provided by (used in)
operating activities (2,914,000) 211,000
---------------- --------------
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 (271,000) (54,000)
---------------- --------------
Net cash used in investing activities (8,872,000) (54,000)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity issued in Simione/MCS merger 12,148,000 -
Capital contribution from former parent - 3,000
Proceeds from (payment on) notes payable 7,000 -
Proceeds from issuance of preferred stock 1,000,000 -
Increase (decrease) in notes payable 583,000 -
Dividends paid (to Mestek by MCS) - (161,000)
---------------- --------------
Net cash provided by (used in)
financing activities 13,738,000 (158,000)
---------------- --------------
Net change in cash and cash
equivalents 1,952,000 (1,000)
Cash and cash equivalents, beginning of period 47,000 60,000
---------------- --------------
Cash and cash equivalents, end of period $ 1,999,000 $ 59,000
================ ==============
</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.
6
<PAGE>
SIMIONE CENTRAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six month period ended June 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 June 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 six month period ended June 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
<PAGE>
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 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 percentage of
completion 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
<PAGE>
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.
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 June 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.
9
<PAGE>
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
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 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.
DISCONTINUED OPERATIONS
The discontinued operations reported in the Company's results of operations
for the six months ended June 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.
10
<PAGE>
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 SIX MONTHS ENDED JUNE 30,
--------------------------------
2000 1999
---------------- ---------------
Net revenues $ 14,268,000 $ 25,025,000
Net income (loss) $ (6,073,000) $ (3,941,000)
Net income (loss) per share - basic $ (1.58) $ (1.02)
Net income (loss) per share - diluted $ (1.58) $ (1.02)
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:
DEPRECIATION
JUNE 30, DECEMBER 31, ESTIMATED
2000 1999 USEFUL LIVES
----------------- ------------------ ------------
Furniture and Fixtures $ 1,516,000 $ 315,000 10 years
Computer equipment 5,876,000 1,483,000 5 years
----------------- ------------------
7,392,000 1,798,000
Accumulated depreciation (5,151,000) (878,000)
----------------- ------------------
$ 2,241,000 $ 920,000
================= ==================
11
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NOTE 5 - INTANGIBLE ASSETS
Intangible assets at June 30, 2000 consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ACCUMULATED NET BOOK AMORTIZATION
COST AMORTIZATION VALUE PERIOD
----------------- ------------------ ---------------- ---------------------
Developed technology $10,650,000 $ (443,000) $ 10,207,000 8 years
Assembled workforce 2,300,000 (153,000) 2,147,000 5 years
Customerb base 1,700,000 (63,000) 1,637,000 9 years
Goodwill 12,151,000 (579,000) 11,572,000 7 years
--------------- ----------------- -----------------
$26,801,000 $ (1,238,000) $ 25,563,000
================ ================= ==================
</TABLE>
Amortization of the above intangible assets will reduce operating income
(or increase operating losses) by approximately $3.1 million in the year 2000.
12
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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 June 30, 2000.
The Company's actual income tax expense (benefit) for the three months
ended June 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
June 30, 2000 December 31, 1999
------------- -----------------
Short Term:
----------
Note Payable - David O. Ellis $ 250,000
Line of Credit 1,413,000
Note Payable - Mestek $ 1,650,000 $ -
============ ==================
Long Term:
---------
Notes Payable - Barrett C. O'Donnell $ 500,000 $ -
============= ==================
On September 9, 1999, Simione Central Holdings, Inc. (Simione) entered into
a $5.0 million Loan and Security Agreement (Line of Credit) with Silicon Valley
Bank, a commercial bank, under which substantially all of its assets were
pledged as security. Availability under the Line of Credit was based upon a
mathematical formula applied to trade receivables. When the Simione/MCS merger
was completed on March 7, 2000, the Company succeeded to the obligations of
Simione under the Line of Credit and substantially all of the Company's assets
were pledged as security for the Line of Credit. Borrowings under the Line of
Credit accrued interest at the prime rate plus 2% per annum. On April 13, 2000,
the Company executed a Loan Modification Agreement relative to the Line of
Credit which required the Company to limit its net losses to certain amounts for
each quarterly period in the year 2000 and further required the Company to
obtain not less than $3.0 million in additional capital prior to June 15, 2000.
The line of credit was paid off and terminated on July 12, 2000.
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. When the Simione/MCS merger was
completed on March 7, 2000, the Company succeeded to these obligations. The note
payable to Mr. O'Donnell bears interest at 9% per annum, matures on May 11,
2002, and requires quarterly payment of accrued interest. The note payable to
Dr. Ellis bears interest at 9% per annum, matures on August 15, 2000, and also
requires quarterly payment of accrued interest. Dr. Ellis and Mr. O'Donnell are
directors of the Company.
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 June 30, 2000.
13
<PAGE>
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 the David O. Ellis note. 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.
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
As previously disclosed, in the first quarter of 2000, the NASDAQ staff
determined that the Company should be delisted from NASDAQ due to the MCS merger
and the Company's inability after the merger to satisfy the initial listing
criteria. The Company appealed this decision, and NASDAQ held a hearing on this
appeal on March 3, 2000. The NASDAQ Hearing Panel issued a written decision on
June 2, 2000 regarding the Company's listing as a result of which the Company
was removed, effective June 7, 2000, from the NASDAQ National Market and
transferred to the NASDAQ SmallCap Market. The continued listing on the SmallCap
Market was conditioned upon the Company's submission of a standard SmallCap
Listing application package and NASDAQ's receipt, on or before June 13, 2000, of
executed documents relating both to the warrant issued to Mestek, described in
more detail in Note 10 to these Financial Statements, and the proposed
investment by John E. Reed, a director of the Company and the Chairman and Chief
Executive Officer of Mestek, of up to $7.0 million in Simione Central, on terms
described in more detail in Notes 7 and 10 of these Financial Statements, which
conditions have been satisfied. The continued NASDAQ listing is also conditioned
on the Company's ongoing compliance with the minimum bid price requirement and
other listing criteria of the NASDAQ SmallCap Market. The NASDAQ staff did not
raise objections to the terms of the financing with Mr. Reed and the issuance of
the warrant to Mestek, based on its review of their summary of terms.
The Company is engaged in various other 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.
14
<PAGE>
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.
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 by business segment are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-------------------------------- --------------------------------
Revenues
Product related $ 5,233,000 $ 4,682,000 $ 8,768,000 $ 8,722,000
Consulting 1,024,000 - 1,490,000 -
----------- ------------ -------------- --------------
Total $ 6,257,000 $ 4,682,000 $ 10,258,000 $ 8,722,000
=========== ============ ============== ==============
Cost of sales
Product related $ 2,927,000 $ 2,923,000 $ 5,049,000 $ 5,330,000
Consulting 1,027,000 - 1,452,000 -
------------ ------------ -------------- ------------
Total $ 3,954,000 $ 2,923,000 $ 6,501,000 $ 5,330,000
============ ============= ============== ============
Research and
development
Product Related $ 1,780,000 $ 135,000 $ 2,491,000 $ 531,000
============ ============== ============= ============
Depreciation and
amortization
Product related $ 1,040,000 $ -56,000 $ 1,430,000 $ 13,000
Consulting 143,000 - 180,000 -
------------ ------------ ------------- ------------
Total $ 1,183,000 $ 56,000 $ 1,610,000 $ -
============ ============ ============= ============
Net income (loss)
from Continuing
Operations
Product related $(3,285,000) $ 460,000 $ (4,532,000) $ 596,000
Consulting (343,000) - (303,000) -
------------ ------------- --------------- ------------
Total $(3,628,000) $ 460,000 $ (4,835,000) $ 596,000
============ ============= =============== ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, DECEMBER 31,
2000 1999
-------------------- --------------------
Assets
Product related $ 34,793,000 $ 6,696,000
Consulting
4,758,000 -
-------------------- --------------------
Total $ 39,551,000 $ 6,696,000
==================== ====================
</TABLE>
The Net Income (Loss) from continuing operations reported above has been
affected by non-cash depreciation and amortization changes as reported above.
15
<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 $15.00 per share on or prior to December 31, 2000, the Company is required
to issue up to an additional 606,904 common shares to the former holders of the
Series A Preferred Stock to the extent of the price deficiency or,
alternatively, to pay cash or a combination of cash and stock equal in value to
the price deficiency.
Preferred Stock-10,000,000 shares authorized
Series B Preferred Stock -$.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 in connection with
the merger. In connection with the Company's application for listing on the
NASDAQ SmallCap Market, as more fully described in Note 8 to these Financial
Statements, 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 has been 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, as more fully explained in Note 8 to
16
<PAGE>
these Financial Statements, 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 352,444
shares (on a split adjusted basis) of common stock as of July 26, 2000. 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 4,828 have
been cancelled as of July 26, 2000. Of the remaining 290,731 options, 276,358
are vested as of July 26, 2000 and 215,005 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
Gateway LLC, a company owned in part by a prior Chief Executive Officer of
Simione Central Holdings, Inc. (Simione) and another officer of Simione, leases
an office facility to the Company under the terms of an agreement, which expires
December 31, 2001. Gateway LLC sold the lease to a third party in August of
1998.
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 June 30, 2000, the Company had two notes outstanding to
directors. These notes are 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 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
17
<PAGE>
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 &
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.
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.
NOTE 13 - SUBSEQUENT EVENTS
On July 12, 2000, the Company entered into a $6.0 million Loan and Security
Agreement facility (Wainwright Facility) with Wainwright Bank and Trust Company,
a commercial bank, as more fully described in Note 7 to these Financial
Statements. Based on this credit facility, and the J. E. Reed Facility,
described in more detail in Note 7 to these Financial Statements, the Company
believes that it will have sufficient capital to meet its day to day working
capital needs in the year 2000 as well as fund its various product development
initiatives during this period. In consideration with the closing by the Company
of the Wainwright Facility, the Company issued Mestek, Inc. a warrant to
purchase 104,712 shares of the Company's common stock in consideration for
Mestek's guarantee of the Wainwright loan, as more fully explained in Note 10 to
these Financial Statements.
On August 8, 2000, the $500,000 note payable and $100,000 of deferred
salary compensation owed by the Company to Barrett C. O'Donnell, a director of
the Company, was cancelled in exchange for a $600,000 subordinated note,
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.
18
<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 July 28, 2000, the unused
capacity under the John E. Reed and Wainwright Bank and Trust Company lines of
credit are $6,000,000 and $2,901,000, 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 Net Cash Provided by Operating Activities for the three
months ended June 30, 2000 was ($1,501,000). Management believes that this
result was substantially impacted by the Company's need to bring current the
Simione and MCS payables and accrued expenses in the aftermath of the March 7,
2000 Simione/MCS merger. The Company also continued its various new product
development initiatives during the quarter ended June 30, 2000 which further
impacted this figure by approximately $1.8 million as reflected in the Results
of Operations for the three months ended June 30, 2000.
19
<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 delivered 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. 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
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 six
months ended June 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 $3.6
million and $1.8 million on June 30, 2000 and December 31, 1999, respectively,
including in both cases the products of MCS and Simione. The backlog at June 30,
2000 includes approximately $1.3 million in new orders for software systems
booked in June of 2000, principally for the Company's Mestamed products. 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.
20
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net Revenues. Total net revenues for the three months ended June 30, 2000
were $6,257,000, an increase of 33.6% relative to the three months ended June
30, 1999. The financial statements for June 30, 1999, however, include only the
operations of MCS. If the historical operations of Simione (inclusive of
CareCentric Solutions, Inc., which Simione acquired on August 12, 1999) and MCS
were arithmetically combined for the three month period ended June 30, 1999,
revenues (exclusive of Simione's outsourcing segment which was discontinued
prior to the end of 1999) for the three months ended June 30, 1999 would have
been $10,524,000. Comparable revenues for the three months ended June 30, 2000,
therefore, were reduced $4,267,000 or 40.5%, principally due to (1) a
significant decline in home health consulting revenues, which accounted for
approximately $897,000 of the decrease (2) a significant decline in new system
sales of Mestamed, which accounted for approximately $2,416,000 of the decrease,
(3) delays in installing Smart Clipboard product bookings, and (4) reduced new
sales of Simione's historical STAT and Dezine products. The Company believes
that uncertainties in the health care information systems marketplace
surrounding year 2000 functionality and the Simione/MCS merger on March 7, 2000
and its effects (or potential effects) on the Company's software products
significantly impaired the Company's ability to generate bookings in the last
quarter of 1999 and the first quarter of 2000 and led to significantly reduced
revenues in the first and second quarter of 2000.
The Company believes it has made significant progress toward allaying these
concerns 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. Recently, approximately 300
customers attended the First Annual MCS/Simione Central Customer Conference
featuring 75 educational seminars, presentations by leading home health care
experts and exhibits by suppliers of third-party software or hardware and
product partners of Simione.
The Company's operating loss from continuing operations, reflecting the
same assumptions as above for purposes of comparability, increased from
($2,567,000) in the second quarter of 1999 to ($3,467,000) in the second quarter
of 2000. Approximately $350,000 of the increased loss was attributable to higher
amortization and depreciation resulting from the effect of purchase accounting
which was used to account for the Simione/MCS merger. On a comparable basis,
therefore, the Company's operating loss from continuing operations for the
quarter increased only $550,000 despite a revenue drop of $4,267,000. Management
believes the relatively small increase in operating loss from continuing
operations is traceable 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.
Cost of revenues, adjusted as above for purposes of comparability,
decreased from $6,882,000 in the second quarter of 1999 to $3,954,000 in the
second quarter of 2000. Similarly, selling, general and administrative expenses
decreased from $4,069,000 to $2,807,000, over the comparable periods reflecting
in both cases the effect of the cost saving initiatives described above.
Research and development expenses, however, increased from $1,313,000 to
$1,780,000.
Other Income (Expense). Interest expense for the three months ended June 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 June 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 charged by Silicon Valley Bank.
21
<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 subsequently 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 June 30, 2000, and as a result, a
100% deferred tax valuation allowance has been recorded against these assets.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net Revenues. Total net revenues for the six months ended June 30, 2000
increased 17.6% relative to the six months ended June 30, 1999. Results of
operations for the six months ended June 30, 2000 include the operations of
Simione from March 7, 2000 to June 30, 2000, and the operations of MCS for the
full six months. The financial statements for the six months ended June 30, 1999
include only the operations of MCS. If the historical operations of Simione
(inclusive of CareCentric Solutions, Inc. which Simione acquired August 12,
1999) and MCS were arithmetically combined for the six month periods ended June
30, 2000 and 1999, revenues (exclusive of Simione's outsourcing segment which
was discontinued prior to the end of 1999) would have been $13,626,000 for the
six months ended June 30, 2000 and $21,562,000 for the six months ended June 30,
1999. These reductions in revenues were attributable to reduced bookings of
software and equipment sales in the final quarter of 1999 and the first quarter
of year 2000. The Company believes this decrease is the result of uncertainties
in the marketplace resulting from the then pending Simione/MCS merger as well as
customer concerns related to year 2000 functionality. The reduction in
comparable sales revenue is traceable principally to (1) a reduction in home
health consulting revenue of approximately $556,000, (2) a significant decline
in Mestamed new systems and related items sales of approximately $3,727,000, (3)
delays in installing Smart Clipboard product bookings, and (4) reduced new sales
of Simione's historical STAT and Dezine products.
Cost of Revenues (Total). Cost of revenues, including selling, general and
administrative expenses and research and development expenses, adjusted as above
for purposes of comparability, were also substantially reduced from
approximately $24,769,000 for the six months ended June 30, 1999 to
approximately $17,262,000 for the six months ended June 30, 2000, reflecting the
effect of the various cost saving initiatives described earlier. Amortization
and depreciation increased from $1,506,000 to $2,267,000, reflecting the effect
of purchase accounting which was used to account for the Simione/MCS merger on
March 7, 2000.
Other Income (Expense). Interest expense for the six months ended June 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 six months ended June 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 that charged by Silicon Valley
Bank.
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
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 June 30, 2000, and as a
result, a 100% deferred tax valuation allowance has been recorded against these
assets.
22
<PAGE>
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.
23
<PAGE>
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. The Company has had indications that Mr.
McLendon may still pursue "whistleblower" claims against the Company directly.
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. In the event these claims are asserted, 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 dividends
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.
None
24
<PAGE>
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
----------- -----------
10.3* Merger Option Agreement by and between the Company and Mestek,
Inc. dated March 7, 2000
10.4* Series D Convertible Preferred Stock Purchase Agreement dated
June 12, 2000 between the Company and John E. Reed
10.5* Secured Convertible Credit Facility and Security Agreement dated
June 12, 2000 between the Company, Simione Central National, LLC and
Simione Central Consulting, Inc. and John E. Reed
10.6* Warrant dated June 12, 2000 by and between the Company and
Mestek, Inc.
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.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K on June 14, 2000 updating its
listing status on the NASDAQ SmallCap Market.
The Company filed a Report on Form 8-K on June 22, 2000 reporting on
the closing of the debt and equity financings in the Company by John
E. Reed.
The Company filed a Report on Form 8-K/A dated May 18, 2000 reporting
the audited financial statements of MCS, Inc. as of December 31, 1999
and 1998 and the pro forma combined financial statements of Simione
and MCS as of December 31, 1999.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMIONE CENTRAL HOLDINGS, INC.
Dated: August 11, 2000 By:/s/ Steve Shea
--------------------------------
STEVE SHEA
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
10.3* Merger Option Agreement by and between the Company and Mestek, Inc.
dated March 7, 2000
10.4* Series D Convertible Preferred Stock Purchase Agreement dated June
12, 2000 between the Company and John E. Reed
10.5* Secured Convertible Credit Facility and Security Agreement dated June
12, 2000 between the Company, Simione Central National, LLC and Simione
Central Consulting, Inc. and John E. Reed
10.6* Warrant dated June 12, 2000 by and between the Company and Mestek,
Inc.
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.
