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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9848
CARETENDERS HEALTH CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1153720
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Mallard Creek Road, Suite 400, Louisville, Kentucky 40207
(Address of principal executive offices) (Zip Code)
(502) 899-5355
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock NASDAQ National Market
par value $.10 per share
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
As of June 22, 1998, 3,130,413 shares of the Registrant's Common Stock were
outstanding. The aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant as of June 22, 1998 was approximately
$18,782,478 (based on the last sale price of a share of the common stock as of
June 22, 1998 ($6.00), as reported by the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market system).
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive proxy statement, to be filed with the Commission
no later than 120 days after March 31, 1998, is incorporated by reference in
Part III of this report.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART I
ITEM 1. BUSINESS
General Development of Business
- -------------------------------
Incorporated in Delaware in November, 1985, Caretenders(r) Health Corp. and
subsidiaries (collectively "Caretenders" or the "Company") is one of the first
companies to provide integrated adult day health services and home health care
services for seniors and others with chronic and post-acute medical conditions
who wish to remain in their homes and communities. Today more than seven
million senior Americans are in need of alternatives to long-term nursing home
confinement and this number is expanding rapidly. These individuals desire to
remain in their homes and out of nursing homes and conserve their financial
resources as long as possible. The Company provides seniors in need with a
lower-cost alternative to institutional care helping them gain economic
security, access to health care, mobility and independence without isolation.
With its experience in home health care and leadership in adult day health
center operations, the Company is implementing an expansion program offering
integrated home and community based health care marketed under the name
Caretenders' SeniorCare Solutions(tm).
The Company is positioning itself to take advantage of changes and reform
activities in the healthcare industry by focusing its resources on its home
and community based health care business units which consist of adult day
health services and home health care (home health care includes nursing,
infusion therapy and durable medical equipment). These businesses are
involved with the delivery of health care in alternative settings which the
Company believes are preferred by consumers and operate at lower costs than
hospitals and nursing homes. The trend toward alternative site delivery of
healthcare is increasing, as more payor organizations are seeking to reduce
the costs of medical care. Certain changes in Medicare reimbursement for home
nursing services became effective for the Company on April 1, 1998.
Management believes these changes will have a significant effect on the
Company's revenues and financial performance. See Government Regulations for
more information.
Utilizing its strengths in home health care and adult day health services, the
Company is actively addressing the issue of senior care in America by its
comprehensive strategy - Caretenders SeniorCare Solutions. Through care
management by a Registered Nurse (RN), Caretenders helps families identify
solutions for caring for loved ones who can no longer meet their own health
and personal care needs. Through the Company's Care Manager, families can
learn about long-term care options available for seniors and obtain assistance
in choosing from Caretenders' SeniorCare Day Centers(tm) and home health care
centers or, if appropriate, other available community based resources.
Home Health Care Services
- -------------------------
The Company's comprehensive strategy allows it to provide a full range of home
health care services to a patient, enabling physicians, payors and patients to
deal with a single provider. All Caretenders services are rendered through
care management by a registered nurse, who coordinates nursing, home infusion
and equipment services.
Caretenders nursing provides a comprehensive range of both professional and
para-professional services from highly-skilled infusion therapy nursing to
custodial companion care. Professional staff including registered nurses,
licensed practical nurses, physical, speech and occupational therapists, and
medical social workers implement and monitor medical treatment plans
prescribed by physicians. Professional staff are subject to state licensing
requirements in the particular states in which they practice.
Para-professional staff includes home health aides, homemakers and companions
who assist patients with health related tasks and the activities of daily
living.
Home infusion therapy involves the intravenous or other administration of
physician-prescribed nutrients, antibiotics, chemotherapeutic agents and other
medications to patients in their homes. Such therapy generally continues a
plan of treatment initiated in the hospital, or as a substitute for
hospitalization. Home infusion costs are generally between 30% and 70% less
than the same therapy administered in an institutional setting. There are
five major categories of infusion therapy: total parenteral nutrition, enteral
nutrition, antibiotic therapy, chemotherapy and pain management therapy.
Caretenders sells and rents medical equipment for use in the home. While the
Company provides a complete range of equipment, the businesses generally can
be divided into two predominant categories: respiratory/oxygen services and
rehabilitation products.
Caretenders is compensated for its services through (i) private pay (paid by
personal funds), (ii) Medicare, (iii) Medicaid, and (iv) other third party
payors (e.g. insurance companies). See "Item 1. Business -- Payment Sources".
Caretenders employs compensation specialists who advise patients as to the
availability of sources of payment for its services.
Adult Day Health Services
- -------------------------
Adult day health services is an alternative method of providing care for
seniors and other adults who without such care would likely be
institutionalized. The field has grown rapidly, from just 15 centers in the
United States in the early 1970s to over 4,000 today. Still in its early
stages, the industry is highly fragmented with the majority operated by the
non-profit sector. To the best of its knowledge and belief, Caretenders is
the largest for-profit provider of adult day care services in the U.S.
The Company's adult day health centers provide professional, high quality
adult day health services for disabled or frail adults who require some care
or supervision, but who do not require intensive medical attention or
institutionalization. The average center provides care for over 60 guests per
day, seven days a week. Round-trip transportation is available to each
participant.
The centers offer a range of therapeutic and medical services designed to
promote the independence of participants and provide respite to families and
caregivers. On-site staff nurses administer medications and give attention to
medical care. Other services include (i) a light breakfast, a hot lunch, and
an afternoon snack; (ii) a highly structured, individualized and creative
activities program which includes recreation, education, field trips, sports,
crafts, music and group conversations; and (iii) family counseling.
Through care management by a Registered Nurse (RN), Caretenders helps families
identify solutions for caring for loved ones who can no longer meet their own
health and personal care needs. Through the Company's Care Manager, families
can learn about their choices for long-term care for seniors and choose from
Caretenders' SeniorCare Day Centers and home health care centers as well as
other available community based resources.
As of March 31, 1998, the Company's conducts its services in centers in the
following locations:
Home Adult Day Managed
Locations Health Health Agencies Total
- ----------------------------------------------------------------------------
Kentucky:
Louisville area 5 2 5 16
Lexington area 8 1 1 10
Elizabethtown area 1 - 7 7
Indiana:
Evansville 3 1 - 4
Ohio:
Cincinnati 2 1 - 3
Columbus 2 1 - 3
Cleveland 3 1 - 4
Massachusetts:
Boston 3 - - 3
Connecticut:
Stamford 1 1 - 2
Middlebury - 1 - 1
Danbury 1 1 - 2
Maryland:
Baltimore - 10 - 10
Virginia:
Richmond 2 - - 2
Alabama:
Birmingham 6 1 - 7
Florida:
Fort Lauderdale 3 - - 3
West Palm Beach 2 1 - 3
Fort Myers 1 - - 1
---- ---- ---- ----
Total 43 22 13 81
==== ==== ==== ====
Capacity for the Company's adult day health centers was 1,343 guests per day
at the beginning of the year and grew by 12.3% to 1,508 guests per day by the
end of the year.
The Company's strategic plan calls for acquisition of home care providers and
integration of its home health operations with adult day care centers to offer
a fully integrated home and community based health care solution. The
Company's target customers are seniors in need of care seeking to remain
independent and avoid long-term institutional care. Additionally, the Company
will acquire adult day care operations in markets where it also has home
health operations.
See "Government Regulations - Reimbursement Changes" and "Cautionary
Statements - Forward Outlook and Risks", . Management will monitor the
effects of such items and may consider modifications to its expansion and
development strategy when and if necessary.
The following table details the change in the Company's centers during 1998:
Adult Day Managed
Home Health Health Agencies Total
----------------------------------------
Centers as of 3/31/97 37 18 18 73
Change:
Acquired 4 1 - 5
Opened 2 3 1 5
Closed - - (6) (2)
Sold - - - -
----------------------------------------
Subtotal change 6 4 (5) (2)
----------------------------------------
Centers as of 3/31/98 43 22 13 81
========================================
Acquisitions
- ------------
The Company continually considers and reviews possible acquisitions of
businesses that provide health care services similar to those currently
offered by Caretenders. Factors which may affect future acquisition decisions
include the quality and potential profitability of the company under
consideration, and the Company's profitability and ability to finance the
transaction.
During 1997, the Company completed three transactions to acquire two
intermittent home nursing services operations and an adult day health services
operation. These operations added to the Company's market presence in both
Ohio and Florida. No pro forma financial information has been provided as the
acquisitions, individually and in the aggregate, are not significant compared
to the Company's existing operations.
During 1998, the Company completed four transactions to acquire two
intermittent home nursing services operations, a personal care services
operation and an adult day health services operation. These operations added
to the Company's market presence in Florida, Connecticut and Ohio. No pro
forma financial information has been provided as the acquisitions,
individually and in the aggregate, are not significant compared to the
Company's existing operations.
Subsequent to March 31, 1998, the Company announced a non-binding letter of
intent to acquire certain home care operations of Vencor, Inc., a
Louisville, KY-based healthcare provider. Vencor home care operations based
in Indiana and Ohio are covered by the letter. This transaction will not be
significant compared to the Company's existing operations. As of the date of
this filing, no definitive purchase agreement has been executed by the
Company. There can be no assurance that this transaction will be completed.
Competition, Marketing and Customers
- ------------------------------------
Home Health Care
- ----------------
The home health care industry is highly competitive but fragmented, with
competition largely focused on individual products or services. The Company's
competitors can be classified into three categories: nursing services,
infusion therapy, and medical equipment.
The Company believes competition is based primarily on the quality of service
provided, and such quality is measured by responsiveness and the technical
ability of the professional staff. The scope of services offered,
relationships with referral sources and price are also competitive
considerations. Caretenders competes with larger home health care providers
through its comprehensive strategy, which facilitates focused accountability,
quality, reduced administrative burdens and convenience for patients and
physicians. Another competitive factor in the home health care industry is
accreditation by JCAHO (Joint Commission on Accreditation of Healthcare
Organizations), a not-for-profit accreditation organization. All Caretenders
offices are accredited by JCAHO.
In addition to the larger national companies, Caretenders also competes with
numerous local and regional companies and pharmacies. Many of the Company's
competitors have greater resources than the Company.
The Company's home health services are marketed by a direct sales force
primarily to hospital discharge planners, physicians and insurance and managed
care organizations. Referrals may also be sought through advertisements in
several local specialty publications, attendance at major trade shows and
voluntary participation in JCAHO. The Company also utilizes consumer-direct
sales, marketing and advertising programs designed to increase its private pay
business.
Adult Day Health Services
- -------------------------
Like the home health care industry, the adult day health services industry is
also highly competitive but fragmented. Competitors include: other adult day
health centers, ancillary programs provided by nursing homes and hospitals;
other government-financed facilities, assisted living and retirement
communities, and senior adult associations.
The Company believes the primary competitive factors are quality of service
and reputation among referral sources. However, competitors are increasingly
focusing attention on providing alternative site health care services.
Caretenders competes by offering a high quality of care and by helping
families identify and access solutions for care via Caretenders' SeniorCare
Solutions. Adult day care competitive advantages include transportation and
superior facilities and guest activity programs.
The Company markets its adult day health services through its adult day health
center directors and the marketing staff. The directors contact referral
sources in their areas to market the Company's services. Major referral
sources include: Offices on Aging, social workers, hospital discharge planners
and group living facilities.
Government Regulations
- ----------------------
Overview
- --------
The health care industry, particularly home health, has experienced, and is
expected to continue to experience, extensive and dynamic change. In addition
to economic forces and regulatory influences, continuing political debate is
subjecting the health care industry to significant reform. Health care reforms
have been enacted as discussed elsewhere in this document and proposals for
additional changes are continuously formulated by departments of the federal
government, Congress, and state legislatures. Certain adverse changes in
Medicare reimbursement for Medicare-certified home health services became
effective for the Company on April 1, 1998. See "Reimbursement Changes"
below.
Government officials can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost
of doing business, and the methods and amounts of payments for medical care by
both governmental and other payors. Legislative changes to "balance the
budget" and slow the annual rate of growth of Medicare and Medicaid are
expected to continue. Such future changes may further impact reimbursement for
home health care. There can be no assurance that future legislation or
regulatory changes will not have a material adverse effect on the operations
of the Company.
Refer to the sections on Reimbursement Changes and Cautionary Statements -
Forward Outlook and Risks below, the notes to the accompanying financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations for additional information.
Reimbursement Changes
- ---------------------
In August of 1997, President Clinton signed into law the Balanced Budget Act
of 1997 (the BBA). This bill made significant changes in the reimbursement
system for Medicare certified home health services. The primary changes that
affect the Company include a reduction in the reimbursement for oxygen therapy
services and a restructuring of the reimbursement system related to Medicare
certified home care agencies.
Oxygen Reimbursement
The reimbursement of certain oxygen therapy services and products was cut 25%
for services provided on or after January 1, 1998. An additional cut of 5%
will take affect on January 1, 1999. Future increases to the reimbursement
rate have been tied to the Consumer Price Index and will not resume until
2003. Management expects the impact on the Company to be a decrease of
approximately $600,000 in revenues annually (approximately $150,000 in the
fourth quarter of fiscal 1998).
Bonding Requirements for Medicare Providers
The BBA now requires Medicare providers to purchase surety bonds in amounts
generally equal to 15% of Medicare reimbursement for periods up to 10 years.
The bonds must be in effect by July 7, 1998, retroactive to February 27, 1998.
The Company has made arrangements to meet such bonding, the cost of the which
is not expected to be material to the Company's results of operations or
financial position. Under the current rules, agencies that are not able to
secure the required surety bonds will be excluded from participation in the
Medicare program. In June 1998 the offices of two U.S. Senators announced
HCFA's agreement to defer implementation to no later than February 1999.
Interim Payment System for Medicare Certified Home Health Nursing Services
The BBA also includes a new Interim Payment System (IPS) for
Medicare-certified home health services. IPS remains a cost-based
reimbursement system. However, per visit cost limits have been reduced and a
new "Per Beneficiary Limit" (PBL) has been added. IPS is effective for all
home care agencies for cost reporting years beginning on or after October 1,
1997. For the Company's agencies the new system went into effect on April 1,
1998. The BBA states that IPS will remain in effect until a new prospective
payment system (PPS) is implemented for cost reporting years beginning on or
after October 1, 1999.
The Interim Payment System, as well as other requirements imposed upon home
health providers in the BBA were designed to contain the growth in home health
care resulting in slower growth in Medicare home health expenditures. As a
result of these changes, home health providers will be forced to reduce their
costs of providing services and it is expected that utilization of home care
services per beneficiary will decline. Under certain conditions, Medicare
beneficiaries who had previously been entitled to services will no longer
qualify under Medicare reimbursement guidelines. Approximately 42% of the
Company's total revenues are subject to the Interim Payment System guidelines.
The PBL places an aggregate cap on reimbursable costs based on the number of
Medicare patients (beneficiaries) served during a fiscal year multiplied by an
established rate. This rate is calculated using a complicated cost-based
formula which blends historical data from the provider with others in the
region (or in some cases uses national data). This has the effect of placing
an additional limit on reimbursement. This serves to create a ceiling on the
amount of care that can be provided to the average beneficiary and constrains
the utilization of visits per patient.
In passing these new rules Congress expressed the intent of reducing Medicare
home care expenditures by approximately $16.2 billion over 5 years. However,
calculations made by the Congressional Budget Office (CBO) indicate that the
actual spending reductions that will result from IPS as implemented will be
more than $48 billion or three times the intent of Congress. The Health Care
Financing Administration (HCFA) anticipates that 93% of Medicare agencies will
be reimbursed less than their cost. According to the National Association for
Home Care (NAHC) agencies nationwide are experiencing an average 31% reduction
in reimbursement per patient. Although Congress passed the BBA in August 1997
and it went into effect for many providers on October 1, 1997, HCFA did not
publish all the rules and regulations for implementation until March 31, 1998.
Due to complexities in the rules, particularly differences in the effective
date and the Per Beneficiary Limit for different providers, the ultimate
amount of contraction in the home care industry and the effective reduction in
the Medicare home care benefit cannot yet be predicted. However, the Company
believes that the reduction in the Medicare home health program is likely to
equal or exceed the NAHC estimate.
In late calendar 1997 and early 1998, the Company began implementing action
plans to operate under IPS. However, the final rules published by HCFA on
March 31, 1998 were more prohibitive than the Company or the industry
expected. Accordingly, in April 1998, the Company revised its program to
reduce costs further and control utilization for operation in the IPS
environment. Consistent with industry estimates discussed above, the Company
has, since April 1, 1998, experienced a decline in volumes, revenues and
contribution from this portion of its operations compared with the same period
last year. Additionally, the Balanced Budget Act reduced Medicare
reimbursement for certain oxygen therapy services by 25% effective January
1, 1998.
As a result of the combined impact of these reimbursement items, the Company
expects a decline in revenues and earnings from recurring operations for its
fiscal year ending March 31, 1999 and anticipates reporting a consolidated net
operating loss for its first quarter, ending June 30, 1998. The Company is
continuing its assessment of the implications of the current reimbursement
environment and will, as necessary, make additional cost reductions and other
adjustments to its operational and development plans in the future intended to
return the Company to profitability. These actions may result in one-time
charges for severance, branch office closings, impairment of long-lived assets
and other restructuring activities and may significantly reduce the Company's
ability to access capital and pursue development activities. As of March 31,
no such restructuring activities or impairment existed and, accordingly, no
provision for any liabilities or impairment charges that may result from such
actions has been made in the accompanying financial statements.
In addition to IPS, the Balance Budget Act mandated establishment of a
prospective payment system ("PPS") for home health services by October 1, 1999
(April 1, 2000 for the Company). However, rules and regulations have not yet
been developed by HCFA and there can be no assurance that such deadline will
be met. In the event that home care PPS is not implemented by that date, the
BBA as legislated requires cost limits then in existence to be lowered by an
additional 15%. Such lower cost limits, likely would have a material effect
on the operating results and cash flows of the Company. The Company is unable
to predict how PPS will ultimately be designed and implemented and thus is
also unable to predict its impact on the Company. However, by its prospective
nature, PPS should allow providers the opportunity to earn a profit on
services which they are not able to do under IPS which is cost-based.
State legislative proposals continue to be introduced that could impose more
limitations on payments to providers of health care services such as the
Company. Many states have enacted, or are considering enacting, measures that
are designed to reduce their Medicaid expenditures.
The Company cannot predict what additional government regulations, if any,
affecting its business may be enacted in the future, how existing or future
laws and regulations might be interpreted, or whether the Company will be able
to comply with such laws and regulations in its existing or future markets.
Permits and Licensure
- ---------------------
Many states require companies providing certain home health care services to
be licensed as home health agencies. The Company currently is licensed as a
home health agency where required by the law of the states in which it
operates. In addition, certain of the Company's pharmacy operations require
state licensure and are also subject to federal and other state laws and
regulations governing pharmacies and the packaging and repackaging and
dispensing of drugs (including oxygen). Federal laws may require registration
with the Drug Enforcement Administration of the United States Department of
Justice and the satisfaction of certain requirements concerning security,
record keeping, inventory controls, prescription order forms and labeling. In
addition, certain health care practitioners employed by the Company require
state licensure and/or registration and must comply with laws and regulations
governing standards of practice. The failure to obtain, renew or maintain any
of the required regulatory approvals or licenses could adversely affect the
Company's business. There can be no assurance that either the states or the
federal government will not impose additional regulations upon the Company's
activities which might adversely affect its business, results of operations or
financial condition.
Certificates of Need
- --------------------
Certain states require companies providing home health care services to obtain
a certificate of need issued by a state health planning agency. Some states
require such certificates of need only for Medicare-certified home health
agencies. Where required by law, the Company has obtained certificates of need
from those states in which it operates. There can be no assurance that the
Company will be able to obtain any certificates of need which may be required
in the future if the Company expands the scope of its services or if state
laws change to impose additional certificate of need requirements, and any
attempt to obtain additional certificates of need will cause the Company to
incur certain expenses.
Other Regulations
- -----------------
A series of laws and regulations dating back to the Omnibus Budget
Reconciliation Act of 1987 ("OBRA 1987") and through the Balanced Budget Act
of 1997 have been enacted and apply to the Company. Periodic changes have
occurred from time to time since the 1987 Act including reimbursement
reduction and changes to payment rules. Changes are also expected to occur
continuously for the foreseeable future.
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid anti-kickback statute, also
known as the "fraud and abuse law." This law prohibits any bribe, kickback,
rebate or remuneration of any kind in return for, or as an inducement for, the
referral of Medicare or Medicaid patients. The Company may also be affected by
the federal physician self-referral prohibition, known as the "Stark" law,
which, with certain exceptions, prohibits physicians from referring patients
to entities in which they have a financial interest. Many states in which the
Company operates have adopted similar self-referral laws, as well as laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers, if such arrangements are designed to induce or
to encourage the referral of patients to a particular provider.
Health care is an area of extensive and dynamic regulatory change. Changes in
laws or regulations or new interpretations of existing laws or regulations can
have a dramatic effect on permissible activities, the relative costs
associated with doing business, and the amount and availability of
reimbursement by government and third-party payors. Furthermore, the Company
will be required to comply with applicable regulations in each new state in
which it desires to provide services.
Management believes that the Company is in material compliance with applicable
laws. The Company, however, is unable to predict what additional government
regulations, if any, affecting its business may be enacted in the future, how
existing or future laws and regulations might be interpreted or whether the
Company will be able to comply with such laws and regulations either in the
markets in which it presently conducts, or wishes to commence, business. The
Company also is subject to routine and periodic surveys and audits by various
governmental agencies.
Payment Sources
- ---------------
The Company receives payments from Medicare, Medicaid and other cost
reimbursement programs, private pay and insurance policies as detailed below.
As noted above, the Company's dependence on government sponsored reimbursement
programs makes it vulnerable to possible legislative and administrative
regulations and budget cut-backs that could adversely affect the number of
persons eligible for such programs, the amount of allowed reimbursements or
other aspects of the program, any of which could materially affect the
Company. In addition, loss of certification or qualification under
Medicare/Medicaid programs could materially affect the ability of the
Company's adult day health and home health care businesses to effectively
market their services.
The Company's future operating results are dependent in part upon its ability
to attract customers able to pay for the Company's charges from their own and
their families' financial resources. Circumstances which adversely affect the
ability or desire of seniors to pay for the Company's services could have an
adverse effect on the Company.
The following table sets forth the Company's revenues derived from each major
class of payer during the following fiscal years (by percentage of net
revenues):
1998 1997
Insurance & Insurance &
Business Unit Medicare Medicaid Private Pay Medicare Medicaid Private Pay
Home Health Services 59.4% 12.3% 28.3% 47.3% 10.6% 42.1%
Adult Day Health Services 0.0% 78.8% 21.2% 0.0% 80.2% 19.8%
Total - All Services 51.3% 21.4% 27.3% 38.7% 23.3% 38.0%
Changes in payment sources from 1997 to 1998 are primarily a result of the
Company's acquisition and expansion activities which included two businesses
with respect to which a large portion of revenues are derived from Medicare
programs.
In determining charge rates for goods and services provided to customers, the
Company evaluates several factors including cost and market competition. The
Company also negotiates contract rates with third party providers such as
insurance companies. The rates of reimbursement for a significant portion of
the Company's charges are dictated by Federal or State programs such as
Medicare, Medicaid and Workers Compensation.
Insurance
- ---------
The Company and its subsidiaries carry general liability and professional
liability insurance. The Company also carries product liability insurance
associated with those operations requiring such coverage, including the
durable medical equipment operations. The Company's properties are covered by
casualty insurance policies. The Company carries directors and officers
liability with a $10,000,000 limit. The Company believes that its present
insurance coverage is adequate.
Employees and Labor Relations
- -----------------------------
As of March 31, 1998 the Company had approximately 3,400 employees. None of
the Company's employees are represented by a labor organization. Management
believes its relationship with the Company's employees is satisfactory.
Cautionary Statements - Forward Outlook and Risks
- -------------------------------------------------
Information provided herein by the Company contains, and from time to time the
Company may disseminate material and make statements which may contain
"forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). These cautionary
statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of "safe harbor" provisions of the Act.
The Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors including but not limited to the following:
(i) Regulation and Reform
Legislative proposals are continually introduced or proposed in Congress and
in some state legislatures that would effect major changes in the health care
system, either nationally or at the state level. However, the Company cannot
predict whether any of the proposals will be adopted, and if adopted, no
assurance can be given that the implementation of such reforms will not have a
material impact on the operations of the Company.
(ii) Interim Payment System
In August of 1997, President Clinton signed into law the Balanced Budget Act
of 1997 (the BBA), This bill made significant changes in the reimbursement
system for Medicare home health services through a new Interim Payment System
(IPS) for Medicare-certified home health services. IPS remains a cost-based
reimbursement system. However, per visit cost limits have been reduced and a
new "Per Beneficiary Limit" (PBL) has been added. IPS is effective for all
home care agencies for cost reporting years beginning on or after October 1,
1997 and went into effect on April 1, 1998, for the Company. The BBA states
that IPS will remain in effect until a new prospective payment system (PPS) is
implemented for cost reporting years beginning on or after October 1, 1999.
The Interim Payment System, as well as other requirements imposed upon home
health providers in the BBA were designed to contain the growth in home health
care resulting in slower growth in Medicare home health expenditures. As a
result of these changes, home health providers will be forced to reduce their
costs of providing services and it is expected that utilization of home care
services per beneficiary will decline. There can be no assurance that payments
under the IPS and/or PPS programs will be sufficient to cover the costs
allocable to Medicare patients. The Company believes that the implementation
of IPS will have a significant effect on the Company's revenues and results of
operations in the near term. Refer to "Government Regulations - Reimbursement
Changes" for a more detailed discussion of this topic.
(iii) Other Reimbursement Changes
The Company derives substantial portions of its revenues from third-party
payors, including government reimbursement programs such as Medicare and
Medicaid, and non-government sources such as commercial insurance companies,
HMOs, PPOs and contract services. These payors have undertaken
cost-containment measures designed to limit payments to health care providers.
There can be no assurance that payments under these programs will be
sufficient to cover the costs allocable to patients eligible for
reimbursement. The Company cannot predict whether and what additional
proposals or cost containment measures will be adopted or, if adopted, what
effect, if any, such proposals might have on the operations of the Company.
(iv) Competition
The Company competes with numerous well established competitors which have
substantially greater financial resources than the Company. Competitors are
increasingly focusing attention on providing alternative site health care
services, specifically on adult day health services. Such increasing
competition may adversely affect revenues and profitability of Company
operations.
(v) Contract Management Services
The Company provides contract management services to two home health agencies
in the Louisville, KY area operating under the name of Caretenders but owned
by Columbia/HCA. Columbia has announced its plans to divest itself of its
home care operations and the Company has expressed its interest in acquiring
these operations. Due to these changes, the agencies, which previously
operated under the Caretenders trade name have changed their names. The
Company continues to manage these agencies; however a sale of the Columbia
owned operations may result in termination of the management agreements (which
generated approximately $3 million of revenues in fiscal 1998) and the payment
of a termination fee by Columbia to the Company. The Company also owns and
operates a competing agency in the Louisville market. Due to the current
status of events, the Company is unable to predict the ultimate outcome of
this matter. There can be no assurance that the ultimate resolution of this
matter will not have an adverse impact on the Company.
(vi) Insurance
The Company believes its present insurance coverage is adequate. However,
there can be no assurance that such insurance will be available, or, if
available, that such insurance will be either adequate to cover the Company's
liabilities or available at affordable rates. In addition, increasing
insurance costs, and the increasing unwillingness of insurance companies to
insure against certain types of losses, raise some questions as to whether the
Company will be able to obtain or continue its present insurance coverage.
The inability to obtain adequate insurance coverage at affordable rates, or a
loss of existing coverage, could have a material effect on the Company. Refer
to the previous discussion of surety bonds in the section "Government
Regulations - Reimbursement Changes". Although the Company has made
arrangements to meet the bonding requirements imposed by the BBA, there can be
no assurance that the Company will be able to secure such bonds in the future.
Providers which are unable to secure such bonds will be precluded from
participation as a Medicare reimbursed home health provider.
(vii) Private Payment Sources
The Company's future operating results are dependent in part upon its ability
to attract customers able to pay for the Company's charges from their own and
their families' financial resources. Circumstances which adversely affect the
ability or desire of seniors to pay for the Company's services could have an
adverse effect on the Company. In the event that the Company encounters
difficulty in attracting seniors with adequate resources to pay for the
Company's services, the Company would be adversely affected.
(viii) Acquisitions
The Company seeks to establish and increase market share through acquisitions
in existing and new markets. The Company evaluates potential acquisition
candidates that would complement or expand its current services. In attempting
to make acquisitions, the Company competes with other providers, some of which
have greater financial resources than the Company. Management currently
believes that acquisition candidates meeting the criteria of its acquisition
strategy will continue to be identified in fiscal 1999 and certain of these
candidates will be acquired by the Company. However, there can be no
assurance that suitable acquisitions will continue to be identified or that
acquisitions can be consummated on acceptable terms.
(ix) Inclement Weather
The Company provides its services to individuals in home and community
settings. Severe winter weather may hinder the Company's ability to provide
its services and thus impact operating results.
(x) Financing
The Company's ability to pursue its strategic plan is dependent upon its
ability to obtain financing on satisfactory terms and conditions. If the
Company is unable to obtain satisfactory financing it would have an adverse
impact on the Company's liquidity and its ability to execute its development
plans.
(x) ADC Development
During fiscal 1999, the Company plans to develop up to 6 new adult day health
centers after which the Company plans to continue development efforts at a
similar or accelerated pace. The Company's ability to achieve its development
plans will depend upon a variety of factors, many of which are beyond the
Company's control. There can be no assurance that the Company will not suffer
delays in its development program, which could slow the Company's growth. The
successful development of additional operations will involve a number of risks
including the possibility that the Company may be unable to locate suitable
sites at acceptable prices or may be unable to obtain, or may experience
delays in obtaining, necessary zoning, land use, building, occupancy,
licensing and other required governmental permits and authorizations. The
implementation of the Company's development strategy is also dependent upon
the Company's profitability, the financial performance of its adult day care
operations, the availability of financing and the other Cautionary Statements
listed above.
ITEM 2. PROPERTIES
The Company's executive offices are located in Louisville, Kentucky in
approximately 26,000 square feet of space leased from an unaffiliated party.
The Company has 57 locations that each lease from approximately 250 to 23,000
square feet of space in their respective locations. The Company believes that
its facilities are adequate to meet its current needs, and that additional or
substitute facilities will be available if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, is subject to claims and suits arising in the
ordinary course of its business, including claims for damages for personal
injuries. In the opinion of management, the ultimate resolution of any of
these pending claims and legal proceedings will not have a material effect on
the Company's financial position or results of operations.
On January 26, 1994 Franklin Capital Associates L.P., Aetna Life and Casualty
Company and Aetna Casualty and Surety Company, shareholders, who at one time
held approximately 320,000 shares of the Company's common stock (approximately
13% of shares outstanding) filed suit in Chancery Court of Williamson County,
Tennessee claiming unspecified damages not to exceed three million dollars in
connection with registration rights they received in the Company's acquisition
of National Health Industries in February 1991. The suit alleges the Company
failed to use its best efforts to register the shares held by the plaintiffs
as required by the merger agreement. The Company believes it has meritorious
defenses to the claims and does not expect that the ultimate outcome of the
suit will have a material impact on the Company's results of operations,
liquidity or financial position. The Company plans to vigorously defend its
position in this case. No amounts have been recorded in the accompanying
financial statements related to this suit.
In January 1997, Aetna Life and Casualty Company withdrew its claim against
the Company without prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the National Market System of the
NASDAQ Stock Market under the symbol "CTND. Set forth below are the high and
low sale prices for the common stock for the periods indicated reported by
NASDAQ:
Closing Common Stock Prices
- ---------------------------
Quarter Ended: High Low
June 30, 1996 $9.63 $6.50
September 30, 1996 $7.75 $5.25
December 31, 1996 $7.00 $5.37
March 31, 1997 $6.75 $5.37
June 30, 1997 $8.88 $5.50
September 30, 1997 $8.38 $7.13
December 31, 1997 $10.69 $7.00
March 31, 1998 $8.88 $7.00
On June 22, 1998, the last reported sale price for the Common Stock reported
on the NASDAQ National Market System was $6.00 and there were approximately
727 holders of record of the Company's Common Stock. No cash dividends have
been paid by the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from the
consolidated financial statements of the Company for the periods and at the
dates indicated. This information has been restated to reflect the Company's
1 for 5 reverse stock split as further explained in Note 1 to the consolidated
financial statements of the Company. The information is qualified in its
entirety by and should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this and prior year Form
10-Ks.
Consolidated Selected Financial Information
-------------------------------------------
(Dollar amounts in 000's
except per share data)
Year Ended March 31,
1998 1997 1996 1995 1994
-------------------------------------------------
Results of Operations
Net revenues $ 95,183 $ 76,773 $ 63,227 $ 60,836 $ 50,857
Net Income $ 1,412 $ 1,759 $ 1,575 $ 1,248 $ 627
Per share:
Basic:
Number of shares 3,120 3,119 3,119 3,119 3,119
Net Income $ .45 $ .56 $ .50 $ .40 $ .20
Diluted:
Number of shares 3,162 3,142 3,149 3,145 3,175
Net Income $ .45 $ .56 $ .50 $ .40 $ .20
Balance sheet Data as of: March 31,
1998 1997 1996 1995 1994
-------------------------------------------------
Working capital $ 10,908 $ 17,471 $ 13,844 $ 11,641 $ 8,001
Total assets 49,533 38,745 33,217 31,073 30,806
Long term liabilities 11,962 10,689 6,805 7,094 7,367
Total liabilities 27,450 18,081 14,313 13,744 14,731
Stockholders' equity 22,083 20,663 18,904 17,329 16,075
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Strategic Focus
The Company is positioning itself to take advantage of healthcare reform
activities by focusing its resources on its home and community based health
care business units which consist of adult day health services and home health
care (home health care includes nursing, infusion therapy and durable medical
equipment). These businesses are involved with the delivery of health care in
alternative settings which the Company believes are preferred by consumers and
operate at lower costs than hospitals and nursing homes. The trend toward
alternative site delivery of healthcare is increasing, as more payor
organizations are seeking to reduce the costs of medical care.
Today more than seven million senior Americans are in need of alternatives to
long-term nursing home confinement and this number is expanding rapidly.
These individuals desire to remain in their homes and out of nursing homes and
conserve their financial resources as long as possible. Caretenders
SeniorCare Solutions provides seniors in need with a lower-cost alternative to
institutional care helping them gain economic security, access to health care,
mobility and independence without isolation.
Utilizing its strengths in home health care and adult day health services, the
Company is actively addressing the issue of senior care in America by its
comprehensive strategy - Caretenders SeniorCare Solutions. Through care
management by a Registered Nurse (RN), Caretenders helps families identify
solutions for caring for loved ones who can no longer meet their own health
and personal care needs. Through the Company's Care Manager, families can
learn about long-term care options available for seniors and obtain assistance
in choosing from Caretenders' SeniorCare Day and Home Health Care Centers or,
if appropriate, other available community based resources.
The Company's strategic plan calls for acquisition of home care providers and
integration of its home health operations with adult day care centers to offer
a fully integrated home and community based health care solution. The
Company's target customers are seniors in need of care seeking to remain
independent and avoid long-term institutional care. Additionally, the Company
will acquire adult day care operations in markets where it also has home
health operations.
See "Government Regulations - Reimbursement Changes" and "Cautionary
Statements - Forward Outlook and Risks", . Management will monitor the
effects of such items and may consider modifications to its expansion and
development strategy when and if necessary.
The following table details the change in the Company's operations during
1998:
Adult Day Managed
Home Health Health Agencies Total
----------------------------------------
Centers as of 3/31/97 37 18 18 73
Change:
Acquired 4 1 - 5
Opened 2 3 - 5
Closed - - (2) (2)
Sold - - - -
----------------------------------------
Subtotal change 6 4 (2) (2)
----------------------------------------
Centers as of 3/31/98 43 22 16 81
========================================
Earnings - 1998
The Company generated a 25% increase in pre-tax income despite investing in
initial operating losses related to geographic expansion. The increase in
pre-tax income is primarily a result of a 16% increase in net revenues from
recurring operations due to increased volumes. Income tax expense for 1997
included a non-recurring credit of approximately $634,000 or $0.20 per share
related to the reduction in a previously recorded valuation allowance for net
deferred taxes. As a result of these factors, reported earnings per share
were $0.45 in 1998 as compared to $0.56 for 1997. Excluding the 1997
non-recurring income tax credit earnings per share increased to $0.45 in 1998
from $0.36 in 1997.
3/31/98 3/31/97 Increase % Change
Net Revenues
Recurring Operations $88,230,635 $75,952,252 $12,278,383 16%
Start-up Operations (1) 6,951,965 820,787 6,131,178 747%
-------------------------------------------
Total 95,182,600 76,773,039 18,409,561 24%
-------------------------------------------
Pre-tax Income
Recurring Operations $4,979,157 $3,701,535 $1,277,623 35%
Start-up Operations (2,576,075) (1,786,165) (789,910) (44%)
-------------------------------------------
Total 2,403,082 1,915,370 487,712 25%
-------------------------------------------
Net Income as reported
Recurring Operations $2,925,255 $3,400,058 $(474,803) (14%)
Start-up Operations (1,513,444) (1,640,688) 127,244 8%
-------------------------------------------
Total 1,411,811 1,759,370 (347,559) (20%)
===========================================
Weighted Diluted Shares 3,161,706 3,141,865 19,841
Net Income Per Share as reported
Recurring Operations $ 0.93 $ 1.08 $(0.16) (15%)
Start-up Operations (0.48) (0.52) 0.04 9%
-------------------------------------------
Total $ 0.45 $ 0.56 $ (0.11) (20%)
===========================================
As Adjusted for Comparable
Tax Provision
Net Income as reported $1,411,811 $1,759,370 $(347,559) (20%)
1997 Non-recurring credit (634,090) 634,090 100%
to tax expense (2) -------------------------------------------
Net Income as adjusted $1,411,811 $1,125,280 $286,531 25%
===========================================
Net Income as adjusted
Recurring Operations $2,925,255 $2,174,652 $750,604 35%
Start-up Operations (1,513,444) (1,049,372) (464,073) (44%)
-------------------------------------------
Total 1,411,811 1,125,280 286,531 25%
===========================================
Net Income Per Share as adjusted
Recurring Operations $ 0.93 $ 0.69 $ 0.24 35%
Start-up Operations (0.48) (0.33) (0.15) (43%)
-------------------------------------------
Total $ 0.45 $ 0.36 $ 0.09 25%
===========================================
(1) Start-up operations include those businesses started by the Company that
have not been in operation for the entirety of both comparable periods
(2) Reduction of previously recorded valuation allowance related to net
deferred tax assets ($.20 per share)
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year Ended March 31, 1998 Compared With Fiscal Year Ended March 31, 1997
Caretenders Health Corp.
Operating Data
for the Years Ended March 31,
(amounts in thousands)
1998 1997 Change
% of % of % of
Amount Revenues Amount Revenues Amount Revenues
Net Revenues
Home Health Care $78,698 82.7% $62,796 81.8% 15,902 25.3%
Adult Day Health Services 16,485 17.3% 13,977 18.2% 2,508 17.9%
------ ------- ------
95,183 100.0% 76,773 100.0% 18,410 24.0%
------ ------- ------
Cost of Sales and Services
Home Health Care 61,745 78.5% 49,301 78.6% 12,444 25.2%
Adult Day Health Services 13,967 84.7% 10,968 78.4% 2,999 25.7%
------ ------ ------
75,712 79.5% 60,269 78.5% 15,443 25.6%
------ ------ ------
Center Contribution
Home Health Care 16,953 21.5% 13,495 21.4% 3,458 25.6%
Adult Day Health Services 2,518 15.3% 3,009 21.6% (491) (16.3%)
------ ------ ------
19,471 20.5% 16,504 21.5% 2,967 18.0%
Selling, General & Admin 10,856 11.4% 9,363 12.2% 1,493 15.9%
Prov for Uncollectible Accts 2,635 2.8% 2,216 2.9% 419 18.9%
Depreciation and Amortization 2,583 2.7% 2,239 2.9% 344 15.4%
Interest and Other, Net 994 1.0% 771 1.0% 223 28.9%
------ ------ ------
Income Before Taxes 2,403 2.5% $ 1,915 2.5% 488 25.5%
====== ====== ======
HOME HEALTH CARE REVENUES. Net revenue increases in the Company's
existing markets were primarily the result of increased volume for nursing
services, due in part to acquisitions completed during the year. Nursing
volumes increased 31.4%. Additional volumes in respiratory and durable
medical equipment and infusion therapies drove a combined 11.1% increase in
net revenues for those two service lines.
HOME HEALTH CARE COST OF SALES AND SERVICES. Cost of sales and services as a
percent of net revenues decreased slightly primarily as a result of
efficiencies gained from operating a larger number of home health care
centers. Seven additional centers were acquired or opened by the Company
during 1998.
ADULT DAY HEALTH SERVICES NET REVENUES. The increase of $2.5 million in adult
day health services revenues is primarily attributable to the improvement and
growth of the centers added in conjunction with the Company's expansion
strategy which started in 1996. Total days of service provided increased
17.9% from approximately 236,600 in 1997 to 279,000 in 1998. As of March 31,
1998, the Company had 22 centers in operation as compared to 18 at March 31,
1997
ADULT DAY HEALTH SERVICES COST OF SALES AND SERVICES. As a percent of net
revenues, cost of sales and services increased primarily as a result of
absorbing over $1 million of initial operating losses from geographic
expansion.
SELLING, GENERAL AND ADMINISTRATIVE. The increase of $1,493,000 is due
primarily to an increase in certain administrative staff levels and costs
incurred related to the Company's geographic expansion. SG&A as a percent of
revenues declined due to growth in revenues.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the year ended March 31, 1998 was recorded based on management's
evaluation of collectibility.
DEPRECIATION AND AMORTIZATION. The increase of $344,000 is primarily due to
capital investments made by the Company. These capital investments
principally relate to geographic expansion and replacement of certain medical
equipment.
INTEREST AND OTHER, NET. The increase in interest and other, net is
primarily a result of higher average outstanding debt levels associated with
the Company's acquisition and expansion activities.
INCOME TAXES. As of March 31, 1998, the Company has net deferred tax assets
of approximately $690,000 The net deferred tax asset is composed of $88,000
of current deferred tax assets and $602,000 of long-term deferred tax asset.
Prior to 1997 the Company had provided a valuation allowance against net
deferred tax assets based upon management's estimation of realizability of
those assets through future taxable income. This valuation was based in large
part on the Company's history of generating operating income or losses and
expectations (at that time) for the future. Over time the Company
demonstrated an ability to generate operating income such that it became more
likely than not that the deferred tax assets would be realized through future
taxable income and, in accordance with generally accepted accounting
principles for income tax accounting, in 1997 the valuation allowance was
removed. The Company's ability to generate the expected amounts of taxable
income from future operations is dependent upon general economic conditions,
competitive pressures on revenues and margins and legislation and regulation
at all levels of government. There can be no assurances that the Company will
meet its expectations of future taxable income. However, management has
considered the above factors in reaching its conclusions that it is more
likely than not that future taxable income will be sufficient to fully utilize
the deferred tax assets as of March 31, 1998.
Fiscal Year Ended March 31, 1997 Compared With Fiscal Year Ended March 31, 1996
Caretenders Health Corp.
Operating Data
for the Years Ended March 31,
(amounts in thousands)
1 9 9 7 1 9 9 6 Change
------------------- --------------------- -------------------
% of % of
Amount Revenues Amount Revenues Amount %
Net Revenues
Home Health Care $62,796 81.8% $50,822 80.4% $11,974 23.6%
Adult Day Health Services 13,977 18.2% 12,405 19.6% 1,572 12.7%
------- ------- -------
76,773 100.0% 63,227 100.0% 13,546 21.4%
======= ======= =======
Cost of Sales and Services
Home Health Care 49,301 78.6% 39,399 77.5% 9,902 25.1%
Adult Day Health Services 10,968 78.4% 9,331 75.2% 1,637 17.5%
------- ------- -------
60,269 78.5% 48,730 77.1% 11,539 23.7%
======= ======= =======
Center Contribution
Home Health Care 13,495 21.4% 11,423 22.5% 2,072 18.1%
Adult Day Health Services 3,009 21.6% 3,074 24.8% (65) (2.1%)
------- ------- -------
16,504 21.5% 14,497 22.9% 2,007 13.8%
Selling, General & Administrative 9,363 12.2% 8,438 13.3% 925 11.0%
Provision for Uncollectible Accounts 2,216 2.9% 1,669 2.6% 547 32.8%
Depreciation and Amortization 2,239 2.9% 2,057 3.3% 182 8.8%
Interest and Other, Net 771 1.0% 623 1.0% 148 23.8%
------- ------- -------
Income Before Taxes $ 1,915 2.5% $ 1,710 2.7% $ 205 12.0%
======= ======= =======
HOME HEALTH CARE NET REVENUES. Net revenue increases in the Company's
existing markets were primarily the result of increased volume for nursing
services. Nursing volumes increased 38.7%. Additional volumes in respiratory
and durable medical equipment and infusion therapies drove a combined 17.1%
increase for those two service lines.
HOME HEALTH CARE COST OF SALES AND SERVICES. Cost of sales and services as a
percent of net revenues increased primarily as a result of incurring $770,000
of initial operating losses from geographic expansion.
ADULT DAY HEALTH SERVICES NET REVENUES. The increase of $1.6 million in adult
day health services revenues is primarily attributable to improved occupancy
in existing markets. Total days of service provided increased 9.9% from
214,600 in 1996 to 236,000 in 1997. As of March 31, 1997, the Company had 18
centers in operation.
ADULT DAY HEALTH SERVICES COST OF SALES AND SERVICES. As a percent of net
revenues, cost of sales and services increased primarily as a result of
absorbing $495,000 of initial operating losses from geographic expansion.
SELLING, GENERAL AND ADMINISTRATIVE. The increase of $925,000 is due
primarily to an increase in certain administrative staff levels and costs
incurred related to the Company's geographic expansion. SG&A as a percent of
revenues declined as these costs are spread over a larger operation.
PROVISION FOR UNCOLLECTIBEL ACCOUNTS. The provision for uncollectible
accounts for the year ended March 31, 1997 was recorded based on management's
evaluation of collectibility.
DEPRECIATION AND AMORTIZATION. The increase of $182,000 is primarily due to
capital investments made by the Company. These capital investments
principally relate to geographic expansion and replacement of certain medical
equipment.
INTEREST AND OTHER, NET. The increase in interest and other, net is
primarily a result of higher average outstanding debt levels associated with
the Company's acquisition and expansion activities.
INCOME TAXES. As of March 31, 1997, the Company has net deferred tax assets
of approximately $1,264,000. The net deferred tax asset is composed of
$1,647,000 of deferred tax assets and $383,000 of deferred tax liabilities.
Prior to 1997 the Company had provided a valuation allowance against net
deferred tax assets based upon management's estimation of realizability of
those assets through future taxable income. This valuation was based in large
part on the Company's history of generating operating income or losses and
expectations (at that time) for the future. Over time the Company
demonstrated an ability to generate operating income such that it became more
likely than not that the deferred tax assets would be realized through future
taxable income and, in accordance with generally accepted accounting
principles for income tax accounting, in 1997 the valuation allowance was
removed. The Company's ability to generate the expected amounts of taxable
income from future operations is dependent upon general economic conditions,
competitive pressures on revenues and margins and legislation and regulation
at all levels of government. There can be no assurances that the Company will
meet its expectations of future taxable income. However, management has
considered the above factors in reaching its conclusions that it is more
likely than not that future taxable income will be sufficient to fully utilize
the deferred tax assets as of March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Revolving Credit Facility
- -------------------------
The Company has $18 million in revolving credit facilities, comprised of $15
million with the Healthcare Financial Services Division of Heller Financial,
Inc. and $3 million with Bank One, Kentucky NA. Interest accrues on amounts
drawn under the facility at a rate of 1 percent over prime for the Heller
facility and at a rate of 1/2 percent over prime for the Bank One facility.
Availability from the Heller facility is determined pursuant to a formula
principally consisting of a percentage of accounts receivable subject to
certain exclusions.
At March 31, 1998, the Company had total cash and unused borrowings of
approximately $4.3 million available for working capital and development. The
Heller facility remains in effect until October 13, 1999 and for annual one
year terms thereafter unless either party to the credit agreement provides the
other with a written notice of termination one year and 60 days prior to the
renewal date. The Bank One Facility will remain in effect until August 4,
1998. The Company is currently negotiating a replacement credit facility in a
range of $20-$30 million. While there can be no assurance that the
replacement credit facility will be obtained, management believes that it
will be completed during the second quarter of its fiscal 1999 year. If the
Company is unable to obtain satisfactory financing it would have an adverse
impact on the Company's ability to execute its development plans.
Management will continuously pursue additional capital including possible debt
and equity investments in the Company to support a more rapid development of
the business than would be possible with internal funds.
Cash Flows and Financial Condition
- ----------------------------------
Key elements to the Consolidated Statements of Cash Flows were (in thousands):
Net Change in Cash and Cash Equivalents 1998 1997 1996
Provided by (used in)
Operating activities $ 4,390 $ 442 $ 1,817
Investing activities (8,657) (4,257) (993)
Financing activities 4,077 3,269 (528)
--------------- ------------- -------------
Net Change in Cash and Cash Equivalents $ (190) $ (546) $ 296
=============== ============= =============
1998
----
Net cash provided by operating activities of approximately $4.4 million
resulted principally from current period earnings net of changes in
accounts receivable and accounts payable and accrued expenses. Net cash
used in investing activities of approximately $8.7 million resulted
principally from amounts invested in acquisition and expansion activities
and capital expenditures related to purchase of certain durable medical
equipment and real estate. Net cash provided by financing activities of
approximately $4.1 million resulted primarily from an increase in the
Company's credit facility related to investments made in acquisitions and
geographic expansion.
1997
----
Net cash provided by operating activities of approximately $442,000
resulted principally from current period earnings net of changes in
accounts receivable and accounts payable and accrued expenses. Net cash
used in investing activities of approximately $4.3 million resulted
principally from amounts invested in acquisition and expansion activities
and capital expenditures related to purchase of certain durable medical
equipment and real estate. Net cash provided by financing activities of
approximately $3.3 million resulted primarily from an increase in the
Company's credit facility related to investments made in acquisitions and
geographic expansion.
1996
----
Net cash provided by operating activities of approximately $1.8 million
resulted principally from current period earnings net of changes in
accounts receivable and accounts payable and accrued expenses. Net cash
used in investing activities of approximately $993,000 resulted
principally from capital expenditures. Net cash used in financing
activities of approximately $528,000 resulted primarily from principal
payments on term debt and capital leases.
Year 2000 Computer System Issue
- -------------------------------
The year 2000 issue is the result of computer programs which were written
using two digits rather than four to define the applicable year. The
Company's principal information systems operate in a database environment
which uses four digits for the year, and, accordingly, this issue is not
expected to have a significant impact on the majority of the Company's
computer systems. Certain purchased systems used by the Company, and for
which the Company does not control the programming code, use two digits for
the year. These systems are relatively old and have been independently slated
for replacement with new systems that better meet the information needs of the
Company as it expands and deals with the current operating environment. The
Company anticipates that these conversions will be completed to provide
compliance with the requirements to handle the year 2000 issue with no
significant operational concerns. Management currently believes that the
financial resources necessary to accomplish such compliance will not be
material to the Company's financial condition, liquidity or results of
operations. However, there is no guarantee that the Company's expected
results will be achieved and actual results could differ materially from those
expected results.
The Company depends on receipt of payment for services from its payor sources
most of which utilize computer software to process those payments. The
Company has over 3,000 individual payors including Medicare and Medicaid
programs, insurance companies and HMO's. The Company is currently unable to
predict what effect, if any, the year 2000 issue may have on the computer
systems of those payors, or in turn on the Company. System maintenance and
modification costs to existing software will be expensed as incurred. The
costs associated with purchasing replacement software will be capitalized and
amortized over the useful life of the software.
Contract Management Services
- ----------------------------
The Company currently provides contract management services to two home health
agencies in the Louisville, KY area owned by Columbia/HCA Health Corporation
(Columbia). Columbia has announced its plans to divest itself of its home
care operations and the Company has expressed its interest to Columbia to
acquire the managed business. Columbia has announced a transaction to sell
its hospitals in the Louisville market as well. Due to these changes, the
agencies, which previously operated under the Caretenders trade name have
changed their names . The Company continues to manage these agencies;
however a sale of the Columbia owned operations may result in termination of
the management agreements (which generated approximately $3 million of
revenues in fiscal 1998) and the payment of a termination fee by Columbia to
the Company. The Company also owns and operates a competing agency in the
Louisville market. Due to the current status of events, the Company is unable
to predict the ultimate outcome of this matter. There can be no assurance that
the ultimate resolution of this matter will not have an adverse impact on the
Company.
Health Care Reform
- ------------------
The health care industry, particularly home health, has experienced, and is
expected to continue to experience, extensive and dynamic change. In addition
to economic forces and regulatory influences, continuing political debate is
subjecting the health care industry to significant reform. Health care reforms
have been enacted as discussed elsewhere in this document and proposals for
additional changes are continuously formulated by departments of the federal
government, Congress, and state legislatures. Certain adverse changes in
Medicare reimbursement for Medicare-certified home health services became
effective for the Company on April 1, 1998. See "Reimbursement Changes"
below.
Government officials can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost
of doing business, and the methods and amounts of payments for medical care by
both governmental and other payors. Legislative changes to "balance the
budget" and slow the annual rate of growth of Medicare and Medicaid are
expected to continue. Such future changes may further impact reimbursement for
home health care. There can be no assurance that future legislation or
regulatory changes will not have a material adverse effect on the operations
of the Company.
Refer to the sections on Reimbursement Changes and Cautionary Statements -
Forward Outlook and Risks below, the notes to the accompanying financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations for additional information.
Reimbursement Changes
- ---------------------
In August of 1997, President Clinton signed into law the Balanced Budget Act
of 1997 (the BBA). This bill made significant changes in the reimbursement
system for Medicare certified home health services. The primary changes that
affect the Company include a reduction in the reimbursement for oxygen therapy
services and a restructuring of the reimbursement system related to Medicare
certified home care agencies.
OXYGEN REIMBURSEMENT
The reimbursement of certain oxygen therapy services and products was cut 25%
for services provided on or after January 1, 1998. An additional cut of 5%
will take affect on January 1, 1999. Future increases to the reimbursement
rate have been tied to the Consumer Price Index and will not resume until
2003. Management expects the impact on the Company to be a decrease of
approximately $600,000 in revenues annually (approximately $150,000 in the
fourth quarter of fiscal 1998).
BONDING REQUIREMENTS FOR MEDICARE PROVIDERS
The BBA now requires Medicare providers to purchase surety bonds in amounts
generally equal to 15% of Medicare reimbursement for periods up to 10 years.
The bonds must be in effect by July 7, 1998, retroactive to February 27, 1998.
The Company has made arrangements to meet such bonding, the cost of the which
is not expected to be material to the Company's results of operations or
financial position. Under the current rules, agencies that are not able to
secure the required surety bonds will be excluded from participation in the
Medicare program. In June 1998 the offices of two U.S. Senators announced
HCFA's agreement to defer implementation to no later than February 1999.
INTERIM PAYMENT SYSTEM FOR MEDICARE CERTIFIED HOME HEALTH NURSING SERVICES
The BBA also includes a new Interim Payment System (IPS) for
Medicare-certified home health services. IPS remains a cost-based
reimbursement system. However, per visit cost limits have been reduced and a
new "Per Beneficiary Limit" (PBL) has been added. IPS is effective for all
home care agencies for cost reporting years beginning on or after October 1,
1997. For the Company's agencies the new system went into effect on April 1,
1998. The BBA states that IPS will remain in effect until a new prospective
payment system (PPS) is implemented for cost reporting years beginning on or
after October 1, 1999.
The Interim Payment System, as well as other requirements imposed upon home
health providers in the BBA were designed to contain the growth in home health
care resulting in slower growth in Medicare home health expenditures. As a
result of these changes, home health providers will be forced to reduce their
costs of providing services and it is expected that utilization of home care
services per beneficiary will decline. Under certain conditions, Medicare
beneficiaries who had previously been entitled to services will no longer
qualify under Medicare reimbursement guidelines. Approximately 42% of the
Company's total revenues are subject to the Interim Payment System guidelines.
The PBL places an aggregate cap on reimbursable costs based on the number of
Medicare patients (beneficiaries) served during a fiscal year multiplied by an
established rate. This rate is calculated using a complicated cost-based
formula which blends historical data from the provider with others in the
region (or in some cases uses national data). This has the effect of placing
an additional limit on reimbursement. This serves to create a ceiling on the
amount of care that can be provided to the average beneficiary and constrains
the utilization of visits per patient.
In passing these new rules Congress expressed the intent of reducing Medicare
home care expenditures by approximately $16.2 billion over 5 years. However,
calculations made by the Congressional Budget Office (CBO) indicate that the
actual spending reductions that will result from IPS as implemented will be
more than $48 billion or three times the intent of Congress. The Health Care
Financing Administration (HCFA) anticipates that 93% of Medicare agencies will
be reimbursed less than their cost. According to the National Association for
Home Care (NAHC) agencies nationwide are experiencing an average 31% reduction
in reimbursement per patient. Although Congress passed the BBA in August 1997
and it went into effect for many providers on October 1, 1997, HCFA did not
publish all the rules and regulations for implementation until March 31, 1998.
Due to complexities in the rules, particularly differences in the effective
date and the Per Beneficiary Limit for different providers, the ultimate
amount of contraction in the home care industry and the effective reduction in
the Medicare home care benefit cannot yet be predicted. However, the Company
believes that the reduction in the Medicare home health program is likely to
equal or exceed the NAHC estimate.
In late calendar 1997 and early 1998, the Company began implementing action
plans to operate under IPS. However, the final rules published by HCFA on
March 31, 1998 were more prohibitive than the Company or the industry
expected. Accordingly, in April 1998, the Company revised its program to
reduce costs further and control utilization for operation in the IPS
environment. Consistent with industry estimates discussed above, the Company
has, since April 1, 1998, experienced a decline in volumes, revenues and
contribution from this portion of its operations compared with the same period
last year. Additionally, the Balanced Budget Act reduced Medicare
reimbursement for certain oxygen therapy services by 25% effective January
1, 1998.
As a result of the combined impact of these reimbursement items, the Company
expects a decline in revenues and earnings from recurring operations for its
fiscal year ending March 31, 1999 and anticipates reporting a consolidated net
operating loss for its first quarter, ending June 30, 1998. The Company is
continuing its assessment of the implications of the current reimbursement
environment and will, as necessary, make additional cost reductions and other
adjustments to its operational and development plans in the future intended to
return the Company to profitability. These actions may result in one-time
charges for severance, branch office closings, impairment of long-lived assets
and other restructuring activities and may significantly reduce the Company's
ability to access capital and pursue development activities. As of March 31,
no such restructuring activities or impairment existed and, accordingly, no
provision for any liabilities or impairment charges that may result from such
actions has been made in the accompanying financial statements. .
In addition to IPS, the Balance Budget Act mandated establishment of a
prospective payment system ("PPS") for home health services by October 1, 1999
(April 1, 2000 for the Company). However, rules and regulations have not yet
been developed by HCFA and there can be no assurance that such deadline will
be met. In the event that home care PPS is not implemented by that date, the
BBA as legislated requires cost limits then in existence to be lowered by an
additional 15%. Such lower cost limits, likely would have a material effect
on the operating results and cash flows of the Company. The Company is unable
to predict how PPS will ultimately be designed and implemented and thus is
also unable to predict its impact on the Company. However, by its prospective
nature, PPS should allow providers the opportunity to earn a profit on
services which they are not able to do under IPS which is cost-based.
State legislative proposals continue to be introduced that would impose more
limitations on payments to providers of health care services such as the
Company. Many states have enacted, or are considering enacting, measures that
are designed to reduce their Medicaid expenditures.
The Company cannot predict what additional government regulations, if any,
affecting its business may be enacted in the future, how existing or future
laws and regulations might be interpreted, or whether the Company will be able
to comply with such laws and regulations in its existing or future markets.
Impact of Inflation
- -------------------
Management does not believe that inflation has had a material effect on income
during the past several years.
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk
Not appplicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
1998 1997 1996
Net revenues $95,182,600 $76,773,039 $63,226,968
Cost of sales and services 75,711,768 60,268,808 48,729,847
Selling, general and administrative expenses 10,856,509 9,363,031 8,438,050
Depreciation and amortization expense 2,582,653 2,239,194 2,057,092
Provision for uncollectible accounts 2,634,985 2,215,537 1,668,844
---------- ---------- ----------
Income before interest expense, 3,396,685 2,686,469 2,333,135
net and provision for income taxes
Interest expense, net 993,602 771,099 622,852
---------- ---------- ----------
Income before provision for income taxes 2,403,083 1,915,370 1,710,283
Provision for income taxes 991,272 156,000 135,000
---------- ---------- ----------
Net income $ 1,411,811 $ 1,759,370 $ 1,575,283
========== ========== ==========
PER SHARE:
Weighted average shares outstanding:
Basic 3,120,436 3,119,436 3,119,436
Diluted 3,161,706 3,141,865 3,148,707
Net income per share:
Basic $ 0.45 $ 0.56 $ 0.50
Diluted $ 0.45 $ 0.56 $ 0.50
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 1998 March 31, 1997
CURRENT ASSETS:
Cash and cash equivalents $ 824,293 $ 1,014,604
Accounts receivable - net of allowance for uncollectible accounts of
approximately $3,691,000 and $3,153,000 respectively 23,832,574 20,436,964
Prepaid expenses and other current assets 1,649,579 1,765,168
Deferred tax assets 88,635 1,646,990
------------ ------------
TOTAL CURRENT ASSETS 26,395,081 24,863,726
PROPERTY AND EQUIPMENT - net 7,752,103 4,959,217
COST IN EXCESS OF NET ASSETS ACQUIRED - net of
accumulated amortization of approximately $1,719,000
and $1,430,000, respectively 13,514,130 7,723,263
OTHER ASSETS 1,871,309 1,198,367
------------ ------------
TOTAL ASSETS $ 49,532,623 $ 38,744,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 12,139,101 $ 7,031,021
Current portion of term debt and capital lease obligations 3,248,185 261,716
Other current liabilities 100,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 15,487,286 7,392,737
------------ ------------
LONG-TERM LIABILITIES:
Revolving credit facility 11,038,646 9,754,640
Term debt and capital lease obligations 197,184 145,308
Other liabilities 726,614 788,616
------------ ------------
TOTAL LONG-TERM LIABILITIES 11,962,444 10,688,564
------------ ------------
TOTAL LIABILITIES 27,449,730 18,081,301
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, par value $.10;
10,000,000 shares authorized; 3,130,436 and 3,129,436 issued and
outstanding, respectively 313,044 312,944
Treasury stock, at cost, 10,000 shares (95,975) (95,975)
Additional paid-in capital 25,345,586 25,337,876
Accumulated deficit (3,479,762) (4,891,573)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 22,082,893 20,663,272
------------ ------------
$ 49,532,623 $ 38,744,573
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997, and 1996
Additional Total
Common Stock Treasury Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- --------- -------- -------- ------------ ------------ ------------
Balance, March 31, 1995 3,129,436 $ 312,944 10,000 $ (95,975) $ 25,337,876 $ (8,226,226) $ 17,328,619
Net Income - - - - - 1,575,283 1,575,283
--------- --------- -------- -------- ------------ ------------ ------------
Balance, March 31, 1996 3,129,436 312,944 10,000 (95,975) 25,337,876 (6,650,943) 18,903,902
Net Income - - - - - 1,759,370 1,759,370
--------- --------- -------- -------- ------------ ------------ ------------
Balance, March 31, 1997 3,129,436 312,944 10,000 (95,975) 25,337,876 (4,891,573) 20,663,272
Options Exercised 1,000 100 - - 7,710 - 7,810
Net Income - - - - - 1,411,811 1,411,811
--------- --------- -------- -------- ------------ ------------ ------------
Balance, March 31, 1998 3,130,436 $ 313,044 10,000 $ (95,975) $ 25,345,586 $ (3,479,762) $ 22,082,893
========= ========= ======== ======== ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1998 1997 1996
Cash flows from operating activities:
Net income $ 1,411,811 $ 1,759,370 $ 1,575,283
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,582,653 2,239,194 2,057,092
Deferred income taxes 574,000 (192,000) (492,000)
Provision for uncollectible accounts 2,634,985 2,215,537 1,668,844
----------- ----------- -----------
7,203,449 6,022,101 4,809,219
Change in certain net current assets, net of the effects of acquisitions
(Increase) decrease in:
Accounts receivable (6,143,660) (5,455,101) (3,588,432)
Prepaid expenses and other current assets 171,743 (274,784) (551,879)
Increase (decrease) in:
Accounts payable and accrued expenses 3,158,029 156,628 999,625
Other liabilities - (6,985) 148,820
----------- ----------- -----------
Net cash provided by (used in) operating activities 4,389,561 441,859 1,817,353
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (4,017,796) (2,620,942) (1,015,161)
Acquisitions, net of cash acquired (4,439,746) (1,084,846) -
Other assets (199,344) (551,245) 21,827
----------- ----------- -----------
Net cash (used in) provided by investing activities (8,656,886) (4,257,033) (993,334)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on term debt and capital leases (163,549) (441,202) (607,959)
Net revolving credit facility borrowings 4,302,006 3,902,932 80,206
Other (61,443) (192,993) -
----------- ----------- -----------
Net cash provided by (used in) financing activities 4,077,014 3,268,737 (527,753)
----------- ----------- -----------
Net (decrease) increase in cash (190,311) (546,437) 296,266
Cash and cash equivalents at beginning of year 1,014,604 1,561,041 1,264,775
----------- ----------- -----------
Cash and cash equivalents at end of year $ 824,293 $ 1,014,604 $ 1,561,041
=========== =========== ===========
Supplemental Information
Cash paid for interest $ 1,049,000 $ 691,000 $ 611,000
=========== =========== ===========
Cash paid for income taxes $ 197,000 $ 52,000 $ 671,000
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
BASIS OF CONSOLIDATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Caretenders
Health Corp. and its wholly-owned subsidiaries ("the Company"). The Company
provides adult day health services and home health care services to
individuals in Alabama, Connecticut, Florida, Indiana, Kentucky, Maryland,
Massachusetts, Ohio and Virginia. All material intercompany transactions and
accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Uninsured deposits at March 31, 1998, and 1997 were approximately $724,000 and
$915,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives. The estimated useful
lives of depreciable assets are as follows:
Estimated
Useful Life
Building and Leasehold Improvements 5 - 30
Medical and Office Equipment 3 - 8
Transportation and Other Equipment 3 - 5
Included in Property and Equipment is rental equipment which may be sold.
Upon sale, the cost net of related accumulated depreciation is charged to
costs of sales and services.
COST IN EXCESS OF NET ASSETS ACQUIRED
The costs in excess of fair value of net assets acquired are stated at cost
and amortized on a straight-line basis over their estimated useful lives which
range from 20 (approximately $6.8 million, net) to 40 years (approximately
$6.7 million, net).
Subsequent to its acquisitions, the Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. At March 31, 1998, no such events or circumstances
existed warranting such revisions to the lives or recorded amounts of recorded
goodwill. When factors indicate that goodwill should be evaluated for
possible impairment, the Company will utilize appropriate methods (such as
discounted cash flows over the remaining life of the goodwill), in measuring
whether or not the goodwill is recoverable.
CAPITALIZATION POLICIES
Maintenance, repairs and minor replacements are charged to expense as
incurred. Major renovations and replacements are capitalized to appropriate
property and equipment accounts. Upon sale or retirement of property, the
cost and related accumulated depreciation are eliminated from the accounts and
the related gain or loss is recognized in income.
Construction costs incurred to ready a project for its intended use are
capitalized for major development projects and are amortized over the lives of
the related assets. These costs will be amortized over the life of the
specific leases.
Pre-opening costs related to the start up of new operations and facilities are
deferred and amortized over two years beginning with commencement of
operations. The unamortized balance of capitalized pre-opening costs as of
March 31, 1998 and 1997 was approximately $651,000 and $470,000, respectively
and is included in other assets on the accompanying balance sheet. During
1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5),
The statement provides guidance on the financial reporting of start-up and
organization costs to require all such costs to be expensed as incurred. SOP
98-5 is required to be adopted for financial statements for fiscal years
beginning after December 15, 1998. Therefore, this statement will be required
to be adopted by the Company in the fiscal year ending March 31, 2000, if not
adopted earlier. Management has not yet determined the adoption date of SOP
98-5 for the Company. If adopted on April 1, 1998, the Company would report
an after-tax charge of approximately $383,000 for the cumulative effect of a
change in accounting principle.
NET REVENUES
The Company is paid for its services primarily by federal and state
third-party reimbursement programs, commercial insurance companies, and
patients. Revenues are recorded at established rates in the period during
which the services are rendered. Appropriate allowances to give recognition
to third party payment arrangements are recorded when the services are
rendered.
Approximately 73%, 62%, and 55%, of net revenues for the fiscal years ended
March 31, 1998, 1997, and 1996, respectively, were derived under federal and
state third-party reimbursement programs. These revenues are based, in part,
on cost reimbursement principles and are subject to examination and
retroactive adjustment by agencies administering the programs. Management
continuously evaluates the outcome of these reimbursement examinations and
provides allowances for losses based upon the best available information. In
the opinion of management, adjustments, if any, would not be material to the
financial position or the results of operations of the Company.
The ability of payors to meet their obligations depends upon their financial
stability, future legislation and regulatory actions. The Company does not
believe there are any significant credit risks associated with receivables
from federal and state third-party reimbursement programs. The allowance for
doubtful accounts principally consists of management's estimate of amounts
that may prove uncollectible from non-governmental payors.
NET INCOME PER SHARE
Net income per share is presented as a unit of basic shares outstanding and
diluted shares outstanding. Diluted shares outstanding is computed based on
the weighted average number of common shares and common equivalent shares
outstanding. Common equivalent shares result from dilutive stock options and
warrants. The following table is a reconciliation of basic to diluted shares
used in the earnings per share calculation:
For the Fiscal Years Ended March 31,
1998 1997 1996
--------- --------- ---------
Basic outstanding shares at year end 3,120,436 3,119,436 3,119,436
Add-common equivalent shares representing shares
issuable upon exercise of dilutive options
and warrants 41,270 22,429 29,271
--------- --------- ---------
Diluted weighted average number of shares at year end 3,161,706 3,141,865 3,148,707
========= ========= =========
REVERSE STOCK SPLIT
On March 22, 1995, the shareholders approved and implemented a one (1) for
five (5) reverse stock split. Simultaneously, the par value per common share
changed from $.02 per share to $.10. Share and per share information have
been restated for all periods presented to reflect this reverse stock split.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 and
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates. Refer also to the notes "NET
REVENUES" and "HEALTHCARE REFORM LEGISLATION, REGULATIONS AND MARKET
CONDITIONS" above for examples of such estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable and
payable and debt instruments. The book values of cash and accounts receivable
and payable are considered representative of their respective fair values.
The fair value of the Company's debt instruments approximate their carrying
values as substantially all of such debt has rates which fluctuate with
changes in market rates.
NOTE 2 - HEALTHCARE REFORM LEGISLATION, REGULATIONS AND MARKET CONDITIONS
- -------------------------------------------------------------------------
HEALTH CARE REFORM
- ------------------
The health care industry, particularly home health, has experienced, and is
expected to continue to experience, extensive and dynamic change. In addition
to economic forces and regulatory influences, continuing political debate is
subjecting the health care industry to significant reform. Health care reforms
have been enacted as discussed elsewhere in this document and proposals for
additional changes are continuously formulated by departments of the federal
government, Congress, and state legislatures. Certain adverse changes in
Medicare reimbursement for home nursing services became effective for the
Company on April 1, 1998.
BALANCED BUDGET ACT OF 1997
- ---------------------------
In August of 1997, President Clinton signed into law the Balanced Budget Act
of 1997 (the BBA). This bill made significant changes in the reimbursement
system for Medicare home health services. The primary changes that affect the
Company include a reduction in the reimbursement for oxygen therapy services
and a restructuring of the reimbursement system related to Medicare certified
home care agencies.
OXYGEN REIMBURSEMENT
The reimbursement of certain oxygen therapy services and products was cut 25%
for services provided on or after January 1, 1998. An additional cut of 5%
will take affect on January 1, 1999. Future increases to the reimbursement
rate have been tied to the Consumer Price Index and will not resume until
2003. Management expects the impact on the Company to be a decrease of
approximately $600,000 in revenues annually (approximately $150,000 in the
fourth quarter of fiscal 1998).
BONDING REQUIREMENTS FOR MEDICARE PROVIDERS
The BBA now requires Medicare providers to purchase surety bonds in amounts
generally equal to 15% of Medicare reimbursement for periods up to 10 years.
The bonds must be in effect by July 7, 1998, retroactive to February 27, 1998.
The Company has made arrangements to meet such bonding, the cost of the which
is not expected to be material to the Company's liquidity, results of
operations or financial position. Under the current rules, agencies that are
not able to secure the required surety bonds will be excluded from
participation in the Medicare program. In June 1998 the offices of two U.S.
Senators announced HCFA's agreement to defer implementation to no later than
February 1999.
INTERIM PAYMENT SYSTEM FOR MEDICARE CERTIFIED HOME HEALTH NURSING SERVICES
The BBA also includes a new Interim Payment System (IPS) for
Medicare-certified home health services. IPS remains a cost-based
reimbursement system. However, per visit cost limits have been reduced and a
new "Per Beneficiary Limit" (PBL) has been added. IPS is effective for all
home care agencies for cost reporting years beginning on or after October 1,
1997. For the Company's agencies the new system went into effect on April 1,
1998. The BBA states that IPS will remain in effect until a new prospective
payment system (PPS) is implemented for cost reporting years beginning on or
after October 1, 1999.
The Interim Payment System, as well as other requirements imposed upon home
health providers in the BBA were designed to contain the growth in home health
care resulting in slower growth in Medicare home health expenditures. As a
result of these changes, home health providers will be forced to reduce their
costs of providing services and it is expected that utilization of home care
services per beneficiary will decline. Under certain conditions, Medicare
beneficiaries who had previously been entitled to services will no longer
qualify under Medicare reimbursement guidelines. Approximately 42% of the
Company's total revenues are subject to the Interim Payment System guidelines.
The PBL places an aggregate cap on reimbursable costs based on the number of
Medicare patients (beneficiaries) served during a fiscal year multiplied by an
established rate. This rate is calculated using a complicated cost-based
formula which blends historical data from the provider with others in the
region (or in some cases uses national data). This has the effect of placing
an additional limit on reimbursement. This serves to create a ceiling on the
amount of care that can be provided to the average beneficiary and constrains
the utilization of visits per patient.
In late calendar 1997 and early 1998, the Company began implementing action
plans to operate under IPS. However, the final rules published by HCFA on
March 31, 1998 were more prohibitive than the Company or the industry
expected. Accordingly, in April 1998, the Company revised its program to
reduce costs further and control utilization for operation in the IPS
environment. Consistent with industry estimates discussed above, the Company
has, since April 1, 1998, experienced a decline in volumes, revenues and
contribution from this portion of its operations compared with the same period
last year. Additionally, the Balanced Budget Act reduced Medicare
reimbursement for certain oxygen therapy services by 25% effective January
1, 1998.
As a result of the combined impact of these reimbursement items, the Company
expects a decline in revenues and earnings from recurring operations for its
fiscal year ending March 31, 1999 and anticipates reporting a consolidated net
operating loss for its first quarter, ending June 30, 1998. The Company is
continuing its assessment of the implications of the current reimbursement
environment and will, as necessary, make additional cost reductions and other
adjustments to its operational and development plans in the future intended to
return the Company to profitability. These actions may result in one-time
charges for severance, branch office closings, impairment of long-lived assets
and other restructuring activities and may significantly reduce the Company's
ability to access capital and pursue development activities. As of March 31,
no such restructuring activities or impairment existed and, accordingly, no
provision for any liabilities or impairment charges that may result from such
actions has been made in the accompanying financial statements. .
In addition to IPS, the Balance Budget Act mandated establishment of a
prospective payment system ("PPS") for home health services by October 1, 1999
(April 1, 2000 for the Company). However, rules and regulations have not yet
been developed by HCFA and there can be no assurance that such deadline will
be met. In the event that home care PPS is not implemented by that date, the
BBA as legislated requires cost limits then in existence to be lowered by an
additional 15%. Such lower cost limits, likely would have a material effect
on the operating results and cash flows of the Company. The Company is unable
to predict how PPS will ultimately be designed and implemented and thus is
also unable to predict its impact on the Company. However, by its prospective
nature, PPS should allow providers the opportunity to earn a profit on
services which they are not able to do under IPS which is cost-based.
State legislative proposals continue to be introduced that could impose more
limitations on payments to providers of health care services such as the
Company. Many states have enacted, or are considering enacting, measures that
are designed to reduce their Medicaid expenditures.
The Company cannot predict what additional government regulations, if any,
affecting its business may be enacted in the future, how existing or future
laws and regulations might be interpreted, or whether the Company will be able
to comply with such laws and regulations in its existing or future markets.
CONTRACT MANAGEMENT SERVICES
- ----------------------------
The Company currently provides contract management services to two home health
agencies in the Louisville, KY area owned by Columbia/HCA Health Corporation
(Columbia). Columbia has announced its plans to divest itself of its home
care operations and the Company has expressed its interest to Columbia to
acquire the managed business. Columbia has announced a transaction to sell
its hospitals in the Louisville market as well. Due to these changes, the
agencies, which previously operated under the Caretenders trade name have
changed their names . The Company continues to manage these agencies;
however a sale of the Columbia owned operations may result in termination of
the management agreements (which generated approximately $3 million of
revenues in fiscal 1998) and the payment of a termination fee by Columbia to
the Company. The Company also owns and operates a competing agency in the
Louisville market. Due to the current status of events, the Company is unable
to predict the ultimate outcome of this matter. There can be no assurance that
the ultimate resolution of this matter will not have an adverse impact on the
Company.
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses at March 31, 1998 and 1997 consisted of the following:
1998 1997
---------- ----------
Trade payables 5,769,528 2,935,702
Wages and employee benefits 5,106,929 2,783,305
Accrued taxes 845,694 783,759
Other 416,950 528,255
---------- ----------
12,139,101 7,031,021
========== ==========
NOTE 4 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment, including equipment under capital leases, consist of the following:
March 31, 1998 March 31, 1997
Buildings and improvements $ 1,407,526 $ 713,572
Leasehold improvements 3,025,895 1,894,695
Medical equipment 6,841,810 5,291,958
Office and other equipment 6,025,795 4,578,098
Transportation equipment 1,636,628 1,763,843
------------------- -------------------
18,937,654 14,242,166
Less accumulated depreciation (11,185,551) (9,282,949)
------------------- -------------------
$ 7,752,103 $ 4,959,217
==================== ===================
Property and equipment acquired under capital leases consists principally of
transportation, and medical equipment, of $50,000 and $720,000 at March 31,
1998 and 1997, respectively against which obligations of approximately $14,000
and $434,000 were outstanding at those dates.
Depreciation expense was approximately $1.8 million for the fiscal periods
ended March 31, 1998, 1997, and 1996.
NOTE 5 - REVOLVING CREDIT FACILITY
- ----------------------------------
The Company has a $15 million revolving credit facility with the Healthcare
Financial Services Division of Heller Financial, Inc.. Interest accrues on
the facility at 1 percent over prime (9.5% as of March 31, 1998).
Availability is determined pursuant to a formula principally consisting of a
percentage of accounts receivable subject to certain exclusions, as defined.
The facility is collaterialized by accounts receivable, inventory and a lien
on the stock of the Company's subsidiaries. $14.6 million was available under
the formula on March 31, 1998. The balance outstanding as of March 31, 1998
was approximately $11,039,000. The credit agreement contains certain
restrictive covenants. As of March 31, 1998, the Company was in technical
default of certain covenants however Heller has waived these defaults. The
Heller facility remains in effect until October 13, 1999 and for annual one
year terms thereafter unless either party to the credit agreement provides the
other with a written notice of termination one year and 60 days prior to the
renewal date. Heller has waived its right to give notice of termination under
this provision, and, accordingly, the facility has been extended until October
13, 1999. In addition to the Heller facility, the company has a $3 million
revolving facility with Bank One, Kentucky NA. Interest accrues on the
facility at 1/2 percent over prime. The facility is unsecured and will remain
in effect until August 4, 1998. The balance outstanding as of March 31, 1998
was approximately $3 million. The Company is currently negotiating a
replacement credit facility in a range of $20-$30 million which it expects to
complete during the second quarter of its fiscal 1999 year.
NOTE 6 - TERM DEBT AND CAPITAL LEASE OBLIGATIONS
- ------------------------------------------------
Term debt and capital lease obligation borrowings consist of the following:
March 31, 1998 March 31, 1997
The Company has various promissory notes and
capital leases with interest rates ranging 8% to
10.375% due in varying monthly amounts ranging
from $2,000 to $5,000, related to and collaterized
by certain real property and equipment expiring
at various dates through 2002. $ 427,369 $ 407,024
--------------- -------------
Less current portion (230,185) (261,716)
--------------- -------------
Non-current obligations $ 197,184 $ 145,308
=============== =============
As of March 31, 1998, future net minimum lease payments under capital leases and maturities of term debt
are as follows:
Capital Leases Long-term Debt
1999 $ 19,692 $ 215,947
2000 - 165,012
2001 - 19,295
2002 - 12,877
2003 - -
Thereafter - -
---------- ----------
Total minimum lease payments and maturities 19,692 $ 413,131
==========
Less amount representing interest (5,454)
----------
Present value of minimum lease payments 14,238
Less current portion (14,238)
----------
Long-term portion of capital lease obligations $ -
==========
NOTE 7 - INCOME TAXES
- ---------------------
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109) requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
Company's book and tax bases of assets and liabilities and tax carryforwards
using enacted tax rates in effect for the year in which the differences are
expected to reverse. The principal tax carryforwards and temporary
differences giving rise to the Company's deferred taxes consist of tax net
operating loss carryforwards, differences in book and tax accounting for
depreciation, bonuses, compensated absences, deferred compensation, and
allowance for uncollectible accounts.
The Company's deferred tax assets and liabilities were as follows:
March 31, March 31,
1998 1997
Deferred tax assets
Nondeductible reserves and allowances $ 879,000 $ 496,000
Net operating loss carryforwards 116,000 202,000
Accelerated depreciation 462,000 589,000
AMT Credit 41,000 106,000
Other 254,000
------------- -------------
1,468,000 1,647,000
Valuation allowance - -
------------- -------------
$ 1,468,000 $ 1,647,000
============= =============
Deferred tax liabilities
Accounts receivable $ 605,000 $ -
Other 173,000 $ 383,000
------------- -------------
$ 778,000 $ 383,000
============= =============
Net deferred tax assets $ 690,000 $ 1,264,000
============= =============
Provision for income taxes consist of the following:
Year Ended March 31,
1998 1997 1996
Federal - Current $ 267,000 $ 200,000 $ 30,000
State and local - Current 150,000 148,000 135,000
Deferred 574,000 (192,000) (30,000)
------------- ------------- -------------
$ 991,000 $ 156,000 $ 135,000
============= ============= =============
A reconciliation of the statutory to the effective rate of the Company is as follows:
March 31,
1998 1997 1996
Tax provision using statutory rate $ 817,000 $ 651,000 $ 555,900
Goodwill 79,000 75,000 71,400
Valuation Allowance and other - (1,156,000) (624,000)
State and local taxes, net of federal benefit 186,000 155,000 89,100
Other, net (91,000) 431,000 42,600
------------- ------------- -------------
$ 991,000 $ 156,000 $ 135,000
============= ============= =============
Prior to 1997 the Company had provided a valuation allowance against net
deferred tax assets based upon management's estimation (at that time) of
realizability of those assets through future taxable income. This valuation
was based in large part on the Company's history of generating operating
income or losses and expectations for the future. Over time the Company
demonstrated an ability to generate operating income such that it became more
likely than not that the deferred tax assets would be realized through future
taxable income and, in accordance with generally accepted accounting
principles for income tax accounting, in 1997 the valuation allowance was
removed. The Company's ability to generate the expected amounts of taxable
income from future operations is dependent upon general economic conditions,
competitive pressures on revenues and margins and legislation and regulation
at all levels of government. There can be no assurances that the Company will
meet its expectations of future taxable income. However, management has
considered the above factors in reaching its conclusions that it is more
likely than not that future taxable income will be sufficient to fully utilize
the deferred tax assets as of March 31, 1998 and 1997.
NOTE 8 - STOCK OPTIONS AND WARRANTS
- -----------------------------------
Employee Stock Option Plans
1. The Company has a Nonqualified Stock Option Plan which provides for the
granting of options to key employees, officers, and directors, to purchase up
to 220,000 shares of the Company's common stock. The Board of Directors will
determine the amount and terms of the options which cannot exceed ten years.
2. The Company has an Incentive Stock Option Plan providing key employees,
officers, and directors, options to purchase up to 80,000 shares of the
Company's common stock. Generally, these options expire ten years after the
date of grant, while options held by individuals owning more than 10% of the
Company's common stock expire after five years. The option price cannot be
less than the fair market price of the common stock at the date granted and
the options are not exercisable during the first year.
3. The Company has a Supplemental Nonqualified Stock Option Plan which
provides options for the purchase up to 40,000 shares of the Company's common
stock to key employees and non-employee consultants. The Board of Directors
will determine the amount and terms of the options, which cannot exceed ten
years.
4. The Company has a 1991 Long-term Incentive Nonqualified Stock Option Plan
which provides options to purchase up to 500,000 shares of the Company's
common stock to key employees, officers, and directors. The Board of
Directors will determine the amount and terms of the options, which cannot
exceed ten years.
5. The Company has a 1993 Stock Option Plan for Non-employee Directors which
provides options to purchase up to 120,000 shares of the Company's common
stock to directors who are not employees. Each newly elected director or any
director who does not possess options to purchase 10,000 shares of the
Company's common stock will automatically be granted options to purchase
10,000 shares of common stock at an exercise price based on the market price
as of the date of grant.
Changes in qualified options, non-qualified options, and supplemental non-qualified options
and warrants outstanding are summarized as follows:
Warrants Options
Wtd. Avg Wtd. Avg
Shares Ex. Price Shares Ex. Price
March 31, 1995 286,600 $12.15 551,580 $8.61
Granted - 135,000 $6.30
Exercised - -
Terminated - 163,280 $9.26
------- -------
March 31, 1996 286,600 $12.15 523,300 $7.82
Granted - 41,500 $6.30
Exercised - -
Terminated 20,000 $13.75 26,000 $4.34
March 31, 1997 266,600 $12.03 538,800 $7.87
------- -------
Granted - 46,500 $8.11
Exercised - 1,000 $7.81
Terminated - 151,300 $8.57
------- -------
March 31, 1998 266,600 $12.03 433,000 $7.65
======= =======
At March 31, 1998 and 1997, 266,600 warrants were exercisable. The following table details exercisable
options and related information:
1998 1997
Excercisable at end of year 350,000 420,000
Weighted Average Exercise Price $7.80 $8.18
Weighted Average of Fair Value
of options Granted during the year $5.01 $4.26
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plans. In 1995, Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" (SFAS 123) was
issued and, if fully adopted, changes the method of recognition of costs on
plans similar to the Company's. The Company adopted the disclosure-only
provisions of SFAS 123. Accordingly, no compensation cost has been recognized
for the Company's stock option plans. Had compensation cost for the stock
option plans been determined based upon the fair value at the grant date for
the awards in 1998 and 1997 consistent with the provisions of SFAS 123, the
effect on net income and earnings per share would have been reduced to the
following pro forma amounts:
1998 1997 1996
Net Income: As Reported $ 1,411,811 $ 1,759,370 $ 1,575,283
Pro Forma 1,274,061 1,582,801 1,505,649
Basic EPS: As Reported $ 0.45 $ 0.56 $ 0.50
Pro Forma 0.41 0.51 0.48
Diluted EPS: As Reported $ 0.45 $ 0.56 $ 0.50
Pro Forma 0.40 0.50 0.48
Because the SFAS 123 method of accounting has not been applied to options award prior to April 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be expected in future years.
The following table summarizes information about stock options outstanding at March 31, 1998:
Options Outstanding Options Exercisable
Outstanding Wtd. Avg. Exercisable
Range of As of Remaining Wt. Avg. As of Wt. Avg.
Ex. Price March 31, 1998 Contractual Life Ex. Price March 31, 1998 Ex. Price
------------------------------------------------- --------------------------------------------
$1.95 19,500 1.9 $ 1.95 19,500 $ 1.95
$ 5.50 - 6.50 138,000 6.2 $ 6.15 93,240 $ 6.15
$ 7.00 - 8.13 90,800 7.5 $ 7.97 52,425 $ 7.91
$ 8.75 - 9.69 181,100 3.7 $ 9.06 181,100 $ 9.06
$16.55 - 20.00 3,600 1.4 $ 17.01 3,600 $ 17.01
-------- --------
$ 1.95 - 20.00 433,000 5.2 $ 7.65 349,865 $ 7.80
======== ========
The fair value of each option award is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for awards in 1998 and 1997 respectively: risk-free interest
rates of 5.8% and 6.5%, expected volatility of approximately 51% and 59%,
expected lives of 7.5 years for both 1998 and 1997, and no expected dividend
yields for both 1998 and 1997
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
(a) Operating Leases
The Company leases certain real estate, office space, vehicles and equipment
under noncancellable operating leases expiring at various dates through 2008.
Rent expense amounted to approximately $4.5, $3.5, and $2.6 million for 1998,
1997, and 1996, respectively. At March 31, 1998 the minimum rental payments
under these leases are as follows:
1999 $4,822,000
2000 3,571,000
2001 3,088,000
2002 2,058,000
2003 1,459,000
(b) Employment Contracts
The Company has entered into an employment contract with an officer. In
connection with this contract, the Company is contractually obligated to pay
an annual base salary of $190,000 for three years. In addition, the agreement
contains contingent obligations associated with performance bonuses and
severance.
(c) Medical Malpractice Claims
The Company has insurance coverage with respect to medical malpractice
risks. The malpractice insurance coverage provides coverage up to $1,000,000
per occurrence, and has no deductible for which the Company would be
responsible.
It is the Company's policy to record losses from asserted and unasserted
claims identified by the Company and unreported claims based on estimates that
incorporate the Company's past experience, as well as other considerations
including the nature of each claim or incident and relevant trend factors.
Based on these factors and the Company's insurance coverage, no accrual for
potential losses attributable to asserted and unasserted claims has been
recorded in the accompanying financial statements.
(d) Legal Proceedings
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of its business, including claims for damages
for personal injuries. In the opinion of management, the ultimate resolution
of any of these pending claims and legal proceedings will not have a material
effect on the Company's financial position or results of operations.
On January 26, 1994 Franklin Capital Associates, Aetna Casualty and Surety and
Aetna Life and Casualty, shareholders, who at one time held approximately
320,000 shares of the Company's common stock (approximately 13% of shares
outstanding) filed suit in Chancery Court of Williamson County, Tennessee
claiming unspecified damages not to exceed three million dollars in connection
with registration rights they received in the Company's acquisition of
National Health Industries in February 1991.
The suit alleges the Company failed to use its best efforts to register the
shares held by the plaintiffs as required by the merger agreement. The
Company believes it has meritorious defenses to the claims and does not expect
that the ultimate outcome of the suit will have a material impact on the
Company's results of operation, liquidity or financial position. The Company
plans to vigorously defend its position in this case. No amounts have been
recorded in the accompanying financial statements related to this suit.
In January 1997, Aetna Life & Casualty withdrew its claim against the Company
without prejudice.
NOTE 10 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------
Summarized quarterly financial data for years ended March 31, 1998 and 1997
are as follows (in thousands expect per share data):
1998 1997
------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
------------------------------------- -------------------------------------
Net Revenues $21,521 $22,834 $23,436 $27,392 $17,746 $19,158 $19,630 $20,239
Gross Profit 4,443 4,882 4,744 5,402 3,699 4,305 4,253 4,247
Net Income 293 415 410 294 368 465 512 414
Per Share
Basic $ 0.09 $ 0.13 $ 0.13 $ 0.09 $ 0.12 $ 0.15 $ 0.16 $ 0.13
Diluted $ 0.09 $ 0.13 $ 0.13 $ 0.09 $ 0.12 $ 0.15 $ 0.16 $ 0.13
NOTE 11 - ACQUISITIONS
- ----------------------
In the fourth quarter of fiscal 1998 the Company completed four separate
acquisitions of home and community-based health care businesses in
transactions accounted for as purchases. The results of operations for these
business have been included in the accompanying financial statements from the
date of each acquisition. The aggregate purchase was approximately $10
million of which approximately $4.4 million was paid in cash with the balance
assumed in liabilities. The transactions resulted in approximately $6 million
of cost in excess of net assets acquired (goodwill) which is being amortized
on a straight line basis over its estimated useful life (twenty years). The
allocation of purchase price for these acquisitions has been based on
estimates and information currently available, and, in accordance with
generally accepted accounting principles is subject to change as additional
information becomes available. The impact of the above acquisitions were not
significant for any of the periods presented and, accordingly, proforma
amounts are not presented illustrating the effects of such acquisitions.
Report of Independent Public Accountants
To the Stockholders of Caretenders Health Corp.:
We have audited the accompanying consolidated balance sheets of Caretenders
Health Corp. (a Delaware corporation) and subsidiaries as of March 31, 1998
and 1997 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended March
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caretenders Health Corp. and
subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR
ANDERSEN LLP
Louisville, Kentucky
June 5, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth the Registrants definitive
proxy materials of the Company to be filed with the Commission no later than
120 days after March 31, 1998, except for the information regarding executive
officers of the Company, which is contained in Item 1 of Part I report. The
information required by this Item contained in such definitive proxy materials
is incorporated herein by reference.
The following table sets forth certain information with respect to the
Company's directors and executive officers.
Name Age Position with the Company
- -----------------------------------------------------------------
William B. Yarmuth (1) 46 Chairman of the Board President
and Chief Executive Officer
C. Steven Guenthner (2) 37 Senior Vice President and
Chief Financial Officer
Mary A. Yarmuth (3) 51 Senior Vice President - Service
Development
Ric Pritchard (4) 43 Senior Vice President --
Operations
Todd Lyles (5) 35 Senior Vice President - Planning
and Development
Steven B. Bing (6) 51 Director
Patrick B. McGinnis (7) 51 Director
Donald G. McClinton (8) 64 Director
Tyree G. Wilburn (9) 46 Director
Jonathan Goldberg (10) 46 Director
Wayne T. Smith (11) 52 Director
*Such individuals are not deemed to be executive officers of the Company
pursuant to Rule 16-a(1)(f) promulgated under Section 16 of the Securities
Exchange Act of 1934
Executive officers of the Company are elected by the Board of Directors for
one year and serve at the pleasure of the Board of Directors with the
exception of William B. Yarmuth who has an employment agreement with the
Company. See Item 11 -- William B. Yarmuth Employment Agreement. Mary A.
Yarmuth is married to William B. Yarmuth. There are no other family
relationships between any director or executive officer.
Each Director is elected to hold office until the next annual meeting of
stockholders and until a successor is elected and qualified.
(1) William B. Yarmuth has been a director of the Company since 1991, when
the Company acquired National, where Mr. Yarmuth was Chairman, President
and Chief Executive Officer. After the acquisition, Mr. Yarmuth became
the President and Chief Operating Officer of the Company. Mr. Yarmuth
became Chairman and CEO in 1992. He was Chairman of the Board, President
and Chief Executive Officer of National from 1981 to 1991.
(2) C. Steven Guenthner has been Senior Vice President and Chief Financial
Officer of the Company since 1992. From 1983 through 1992 Mr. Guenthner
was employed as a C.P.A. with Arthur Andersen LLP. Prior to joining the
Company he served as a Senior Manager in the firm's Accounting and Audit
division specializing in mergers and acquisitions, public companies and
the healthcare industry.
(3) Mary A. Yarmuth has served as Senior Vice President of the Company since
1991, currently as Senior Vice President of Service Development. From
1985 to 1991 Ms. Yarmuth served as President of the Company's Nursing
Division. Ms.Yarmuth joined National in 1981.
(4) Ric Pritchard has served as Senior Vice President Operations of the
Company since February of this year. Ric has been in the field of Home
Healthcare since 1981 in the areas of Home Infusion, HME, Managed Care
and Home health Nursing. His functional responsibilities have encompassed
sales, sales management, operations, operations management, managed care
contracting and management and senior management with American Hospital
Supply Corp./Baxter, Healthdyne/ HNS/ NMC Homecare and Olsten Health
Services, Inc.
(5) P. Todd Lyles joined the Company as Senior Vice President Planning and
Development in October 1997. Prior to joining the Company Mr. Lyles was
Vice President Development for the Kentucky Division of Columbia/HCA, a
position he had held since 1993. Mr. Lyles experience also includes
includes 8 years with Humana Inc. in various financial and hospital
management positions.
(6) Steven B. Bing was elected a Director in January 1992. Mr. Bing is an
employee of R. Gene Smith, Inc., a private investment company located in
Louisville, Kentucky. From 1989 to March 1992, Mr. Bing was President of
ICH Corporation, an insurance holding company. From 1984 to 1989, he
served as Senior Vice President of ICH Corporation. He is also a
director of the University of Louisville, First Alliance Corporation, and
various closely-held business entities.
(7) Patrick B. McGinnis was elected a director in October 1994. Mr. McGinnis
is the co-founder of Healthcare Recoveries, Inc. and serves as the
company's chairman and CEO. Healthcare Recoveries, Inc. is a provider of
subrogation and other claims recovery services to the healthcare
industry. From 1979 to 1988, Mr. McGinnis was Vice President-Finance and
Planning for Humana, Inc.
(8) Donald G. McClinton was elected a director in October 1994. From 1986 to
1994, Mr. McClinton was co-chairman of Interlock Industries, Inc., a
privatelyheld company engaged in metal fabrication, corrugated container
manufacturing, aluminum processing and transportation. Presently, Mr.
McClinton is President and part owner of Skylight Thoroughbred Training
Center. Inc., a thoroughbred course training center. He is also a
director of Jewish Hospital Systems,Inc., and Mid-America Bancorp.
(9) Tyree G. Wilburn was elected a director in January 1996. Mr. Wilburn is
a private investor. From 1992 to 1996, Mr. Wilburn was Chief Development
Officer of Community Health Systems, Inc. and, most recently, Executive
Vice President and Chief Financial and Development Officer. From 1974 to
1992 Mr. Wilburn was with Humana Inc. where he held senior and executive
positions in mergers and acquisitions, finance, planning, hospital
operations, audit and investor relations. He is also a director of
Health Directions, Inc.
(10) Jonathan Goldberg was elected a director in February 1997. Mr. Goldberg
is the managing partner of the law firm of Goldberg and Simpson and has
served in that capacity for the last five years.
(11) Wayne T. Smith was elected a director in March 1997. Mr. Smith is
President and Chief Executive Officer of Community Health Systems, Inc.
Mr. Smith was President and Chief Operating Officer of Humana, Inc. from
1993 to 1996 and has served with Humana from 1973 to 1993 in various
capacities,including numerous vice president and divisional president
positions.
ITEMS 11, 12 AND 13. EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The Registrant intends to file a definitive proxy statement with the
Commission pursuant to Regulation 14A (17 CFR 240.14a) not later than 120 days
after the close of the fiscal year covered by this report. In accordance with
General Instruction G(3) to Form 10-K, the information called for by Items 11,
12 and 13 is incorporated herein by reference to the definitive proxy
statement. Neither the report on Executive Compensation nor the performance
graph included in the Company's definitive proxy statement shall be deemed
incorporated herein by reference.
PART IV
Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K.
Page Number
(a)(1) Index to Consolidated Financial Statements
Consolidated Statements of Income for the three years
ended March 31, 1998, 1997, and 1996 31
Consolidated Balance Sheets - March 31, 1998 and 1997 32
Consolidated Statements of Stockholders' Equity for
the three years ended March 31, 1998, 1997, and 1996 33
Consolidated Statements of Cash Flows for the three years
ended March 31, 1998, 1997, and 1996 34
Notes to Consolidated Financial Statements 35-48
Report of Independent Public Accountants 49
(a)(2) Index to Financial Statement Schedule
Report of Independent Public Accountants 58
Schedule II - Valuation and Qualifying Accounts S-1
All other Schedules have been omitted because they are either not required,
not applicable or, the information has otherwise been supplied in the
financial statements or notes thereto.
(a)(3) Exhibits (* denotes filed herein)
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation, as amended
3.2 Amended and Restated By-laws
4.1 Credit Agreement by and between the Company and First National Bank
of Louisville and AmSouth Bank, N.A., and HEALTHSOUTH Rehabilitation
Corporation, as guarantor, dated as of June 29, 1992 with exhibits
(incorporated by reference to Exhibit 10.88 to the Registrant's Form
S-1 Reg.33-46565 dated April 23, 1993)
4.2 Medical Claims, Revolving Loan Agreement, Revolving Credit Note and
exhibits between the Company and Heller Financial dated June 20,
1994
4.3 Other Debt Instruments -- copies of other debt instruments for which
the total debt is less than 10% of assets will be furnished to the
Commission upon request.
10.1 Form of Lender's Notes and Lenders' Warrants (Incorporated by
Reference to Exhibit 10.3 to the Registrant's Registration Statement
on Form S-1 Reg. No. 33-8158 effective December 2, 1986)
10.2 Stockholders and Noteholders Agreement, dated February 5, 1991, by
and among the Company, Senior Kentucky, Inc., National Health
Industries,Inc., Franklin Capital Associates, L.P., Aetna Life and
Casualty Company, The Standard Fire Insurance Company and the
holders of National's common stock(Incorporated by reference to
Exhibit 2.3 to the Registrant's Report on Form 8-K, dated February
5, 1991)
10.3 Nonqualified Stock Option Plan, as amended (Incorporated by
reference to the Registrant's Registration Statement on Form S-8
Reg. No. 33-20815)
10.4 Supplemental Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 19.4 to the Registrant's Report on Form 10-Q
for the Quarter Ended November 30, 1987 Commission File No. 15342)
10.5 Incentive Stock Option Plan, as amended (Incorporated by reference
to the Registrant's Registration Statement on Form S-8 Reg. No.
33-20815)
10.6 Indemnity Agreement, effective as of October 15, 1987, between
Senior Service Corporation and Robert S. Shulman (Incorporated by
Reference to Exhibit 10.46 to the Registrant's Post-Effective
Amendment No. 3 to its Registration Statement on Form S-1 Reg. No.
33-8158)
10.7 Amendment to the Senior Service Corporation 1987 Nonqualified Stock
Option Plan (Incorporated by reference to Exhibit 19.3 to the
Registrant's Report on Form 10-Q for the quarter ended November 30,
1989)
10.9 Provider Agreement, dated May 24, 1989, between the Maryland State
Department of Health and Mental Hygiene and Towson Community Adult
Day Care (Incorporated by reference to Exhibit 10.70 to the
Registrant's Post-Effective Amendment No. 4 to its Registration
Statement on Form S-1 File No. 33-8158)
10.22 1991 Long-Term Incentive Plan
10.23 Warrant Agreement, dated June 29, 1991, between the Company and
HEALTHSOUTH Rehabilitation Corporation (incorporated by reference to
Exhibit 10.88 to the Registrant's Form S-1 Reg. 33-46565 dated April
23, 1993)
10.24 Employment Agreement, dated January 1. 1996, between the Company and
William B. Yarmuth
10.25 Asset Sale Agreements between the Company and Columbia/HCA
Healthcare Corporation
10.26* Management Services Agreement between the Company and Columbia/HCA
Healthcare Corporation
10.27* Asset Purchase Agreement between the Company and Home Care
Solutions, Inc.
10.28* Asset Purchase Agreement between the Company and Metro Home Care,
Inc.
10.29* Asset Purchase Agreement between the Company and Visiting Nurse
Association of Palm Beach County, Inc.
22* List of Subsidiaries of Caretenders Health Corp.
24.1* Consent of Arthur Andersen LLP
27* Financial Data Schedule
(b) Reports on Form 8-K
None.
(c) Exhibits
Described in Item 14(a)(3) of this report
(d) Financial Statement Schedules
Described in Item 14(a)(2) of this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CARETENDERS HEALTH CORP.
July 10, 1998
By /s/ William B. Yarmuth
William B. Yarmuth
Chairman, President and Chief Executive Officer
By /s/ C. Steven Guenthner
C. Steven Guenthner
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
By /s/ William B. Yarmuth July 10, 1998
William B. Yarmuth Date
Director
By /s/ Patrick B. McGinnis July 10, 1998
Patrick B. McGinnis Date
Director
By /s/ Donald G. McClinton July 10, 1998
Donald G. McClinton Date
Director
By /s/ Steven B. Bing July 10, 1998
Steven B. Bing Date
Director
By /s/ Tyree Wilburn July 10, 1998
Tyree Wilburn Date
Director
By /s/ Jonathan Goldberg July 10, 1998
Jonathan Goldberg Date
Director
By /s/ Waynt T. Smith July 10, 1998
Wayne T. Smith Date
Director
Report of Independent Public Accountants
----------------------------------------
To the Stockholders of Caretenders Health Corp.:
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
Financial Statement Schedule is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
June 5, 1998
CARETENDERS HEALTH CORP AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Col. A Col. B Col. C Col. D Col. E
Additions
(1)
Balance at Charged to Charged to
Beginning of Costs Other (2) Balance at
Description Period and Expenses Accounts Deductions End of Period
Year ended March 31, 1998:
Allowance for bad debts $ 3,153,145 $ 2,634,985 $ - $ 2,096,793 $ 3,691,337
Year ended March 31, 1997:
Allowance for bad debts $ 2,884,743 $ 2,215,537 $ - $ 1,947,135 $ 3,153,145
Year ended March 31, 1996:
Allowance for bad debts $ 2,910,272 $ 1,668,844 $ - $ 1,694,373 $ 2,884,743
(1) Charged to bad debt expense.
(2) Write-off of accounts.
CARETENDERS HEALTH CORP
LIST OF SUBSIDIARIES
AS OF MARCH 31, 1998
EXHIBIT 22
Subsidiaries of Caretenders Health Corp
- ---------------------------------------
Adult Day Care of America, Inc.
Adult Day Care of Louisville, Inc.
Adult Day Care of Maryland, Inc.
HouseCalls, Inc.
Adult Day Clubs of America Joint Venture, Ltd.
SEI Publishing Corporation
National Health Industries, Inc.
HHJC Holdings, Inc.
Pro-Care Home Health of Broward, Inc.
Subsidiaries of National Health Industries, Inc.
- ------------------------------------------------
Freelife Medical Equipment, Inc.
Caretenders Homecare,Inc.
Caretenders Infusion of Birmingham, Inc.
Caretenders of Birmingham, Inc.
Caretenders of Boston, Inc.
Caretenders of Cincinnati, Inc.
Caretenders of Columbus, Inc.
Caretenders of Elizabethtown, Inc.
Caretenders of Indiana, Inc.
Caretenders of Indianapolis, Inc.
Caretenders of Lincoln Trail, Inc.
Caretenders of Louisville, Inc.
Caretenders of New Jersey, Inc.
Caretenders of Northern Kentucky, Inc.
Caretenders of Richmond, Inc.
Caretenders of the Bluegrass, Inc.
Caretenders Visiting Services of Richmond, Inc.
House Calls of America, Inc.
Caretenders Infusion Corp.
Metro Home Care, Inc.
National Orthopedic & Rehabilitation Services, Inc.
Physician Affiliates, Inc.
Special Healthcare Services, Inc.
Reliable Home Healthcare, Inc.
Caretenders Visiting Services of Cincinnati, Inc.
Caretenders of Cleveland, Inc.
Caretenders Visiting Services of Columbus, Inc.
Caretenders of Fort Lauderdale, Inc.
Caretenders of Evansville, Inc.
Caretenders of West Palm Beach, Inc.
Caretenders Visiting Services of Indianapolis, Inc.
Caretenders of Charlotte, Inc.
Caretenders Visiting Services of Southwest FL, Inc.
Caretenders of Southwest Florida, Inc.
Caretenders Visiting Services of Southeast FL, Inc.
Subsidiary of HHJC Holdings, Inc.
- ---------------------------------
Home Health of Jefferson County, Inc.
Caretenders of Marshall County, Inc.
EXIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-33601 relating to the Company's Incentive
Stock Option Plan, Registration Statement File No. 33-81122 related to the
1987 Nonqualified Stock Option Plan, Registration Statement No. 33-881100
related to the 1993 Non-Employee Directors Stock Option Plan, and Registration
Statement No. 33-81124 related to the 1991 Long-Term Incentive Plan.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
July 13, 1998