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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number: 0-22162
CARECENTRIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3209241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2625 CUMBERLAND PARKWAY, SUITE 310 30339
ATLANTA, GEORGIA (zip code)
(Address of principal
executive offices)
(Registrant's telephone number, including area code) (678) 264-4400
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Outstanding at
Class 10/31/02
----- --------
COMMON STOCK, $.001 PAR VALUE 4,371,350 SHARES
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CARECENTRIC, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2002 (unaudited) and
December 31, 2001 (audited).
Consolidated Statements of Operations - Three Months and Nine
Months Ended September 30, 2002 and 2001 (unaudited).
Consolidated Statements of Shareholders' Equity - Nine Months
Ended September 30, 2002 (unaudited).
Consolidated Statements of Cash Flows - Three Months and Nine
Months Ended September 30, 2002 and 2001 (unaudited).
Notes to Consolidated Financial Statements - September 30, 2002
(unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared by CareCentric, Inc. ("CareCentric" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of the Company, all adjustments (consisting only of normal recurring entries)
necessary for the fair presentation of the Company's results of operations,
financial position and cash flows for the periods presented have been included.
3
CARECENTRIC, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- ---------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,058,000 $ 201,000
Accounts receivable, net of allowance for doubtful
accounts of $1,299,000 and $1,042,000 respectively 5,747,000 4,185,000
Prepaid expenses and other current assets 590,000 608,000
Notes receivable 107,000 413,000
--------------- ---------------
Total current assets 7,502,000 5,407,000
Purchased software, furniture and equipment, net 1,154,000 1,533,000
Intangible assets, net 4,590,000 5,437,000
Long term notes receivable 431,000 431,000
--------------- ---------------
Total assets $ 13,677,000 $ 12,808,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 5,125,000 $ 5,572,000
Accounts payable 2,214,000 2,185,000
Accrued compensation expense 625,000 593,000
Accrued liabilities 6,408,000 6,574,000
Customer deposits 1,511,000 2,120,000
Unearned revenues 4,873,000 3,981,000
--------------- ---------------
Total current liabilities 20,756,000 21,025,000
Accrued liabilities, less current portion 300,000 750,000
Note payable long-term 8,380,000 5,343,000
Commitments and contingencies
Shareholders' deficit
Preferred Stock: 10,000,000 shares authorized
Series B Preferred, $.001 par value;
5,600,000 issued and outstanding; liquidation value $1.32 6,000 6,000
Series C Preferred, $.001 par value;
850,000 issued and outstanding; liquidation value $1.00 - 1,000
Series D Preferred, $.001 par value;
398,000 issued and outstanding; liquidation value $3.03 - -
Series E Preferred, $.001 par value;
210,000 issued and outstanding; liquidation value $1.02 - -
Common stock, $.001 par value; 20,000,000 shares authorized;
4,371,350 shares issued and outstanding at September 30, 2002 and
December 31, 2001 4,000 4,000
Unearned compensation (152,000) (210,000)
Additional paid-in capital 20,430,000 21,280,000
Stock warrants 1,000,000 1,000,000
Accumulated deficit (37,047,000) (36,391,000)
--------------- ---------------
Total shareholders' deficit (15,759,000) (14,310,000)
--------------- ---------------
Total liabilities and shareholders' deficit $ 13,677,000 $ 12,808,000
=============== ===============
See notes to consolidated financial statements
4
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -------------------------------------
2002 2001 2002 2001
---------------- ----------------- ------------------ ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $ 5,646,000 $ 5,096,000 $ 16,747,000 $ 16,481,000
Costs and expenses:
Cost of revenues 1,739,000 1,973,000 5,200,000 6,490,000
Selling, general and administrative 2,064,000 2,550,000 7,352,000 8,086,000
Research and development 891,000 1,413,000 2,780,000 4,789,000
Amortization and depreciation 424,000 1,011,000 1,272,000 2,912,000
Restructructuring Charge - - - 675,000
-------------- ---------------- --------------- ----------------
Total costs and expenses 5,118,000 6,947,000 16,604,000 22,952,000
-------------- ---------------- --------------- ----------------
Income (loss) from operations 528,000 (1,851,000) 143,000 (6,471,000)
Other income (expense):
Interest expense (174,000) (39,000) (495,000) (311,000)
Interest and other income 12,000 29,000 26,000 223,000
-------------- --------------- --------------- ----------------
Income (loss) before taxes 366,000 (1,861,000) (326,000) (6,559,000)
-------------- --------------- --------------- ----------------
Income tax benefit (expense) - - - -
-------------- --------------- --------------- ----------------
Income (loss) from continuing operations 366,000 (1,861,000) (326,000) (6,559,000)
-------------- --------------- --------------- ----------------
Discontinued operation
Loss on disposal of discontinued $ - $ (2,632,000) $ - $ (2,632,000)
operations
Loss from operations of
discontinued segment before taxes - (226,000) - (483,000)
-------------- ---------------- --------------- ---------------
Net loss from discontinued operations - (2,858,000) - (3,115,000)
Net Income (loss) 366,000 (4,719,000) (326,000) (9,674,000)
============== ================ =============== ===============
Cumulative Preferred Dividends (184,000) (180,000) (330,000) (534,000)
-------------- ---------------- --------------- ---------------
Net Profit (loss) available to common
shareholders $ 182,000 $ (4,899,000) $ (656,000) $ (10,208,000)
============== ================ =============== ===============
Net Income (loss) per share - basic and
diluted
From continuing operations $ 0.08 $ (0.43) $ (0.07) $ (1.55)
Net loss per share - basic and diluted
From discontinued operations $ - $ (0.65) $ - $ (0.73)
-------------- ---------------- ----------------- ----------------
Net Income (loss) per share - basic and
diluted
From operations $ 0.08 $ (1.08) $ (0.07) $ (2.28)
=============== ================ ================= ================
Net Income (loss) per share - basic and
diluted available
to common shareholders $ 0.04 $ (1.12) $ (0.15) $ (2.41)
================ ================ ================= ================
Weighted average common shares -
basic and diluted 4,371,000 4,371,000 4,371,000 4,243,000
================ ================ ================= ================
See notes to consolidated financial statements
5
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited)
ADDITIONAL TOTAL
COMMON PREFERRED UNEARNED PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES STOCK SHARES STOCK COMPENSATION CAPITAL WARRANTS DEFICIT DEFICIT
---------- --------- --------- --------- ------------- ----------- ---------- -------------- --------------
Balance at
December 31, 2001 4,371,000 $ 4,000 7,058,000 $ 7,000 $ (210,000)$21,280,000 $1,000,000 $ (36,391,000) $ (14,310,000)
---------- --------- --------- --------- ------------- ----------- ---------- -------------- --------------
Amortization
of unearned
compensaton 58,000 58,000
Cancellation
of series C
Preferred Stock (1,000) (850,000) (851,000)
Net loss (656,000) (656,000)
---------- --------- --------- --------- ------------- ----------- ---------- -------------- --------------
Balance at
September 30, 2002 4,371,000 $ 4,000 7,058,000 $ 6,000 $ (152,000)$20,430,000 $1,000,000 $ (37,047,000) $ (15,759,000)
========== ========= ========= ========= ============= =========== ========== ============== ==============
See notes to Consolidated Financial Statements
6
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months ended September 30, Nine Months ended September 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 182,000 $(4,899,000) $ (656,000) $ (10,209,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Provision for doubtful accounts 56,000 99,000 300,000 252,000
Amortization and depreciation 424,000 1,099,000 1,272,000 3,277,000
Stock based compensation charge to earnings 18,000 - 58,000 -
Loss on discontinued operations - 2,632,000 - 2,632,000
CHANGES IN ASSETS AND LIABILITIES, NET OF
ACQUISITIONS:
Accounts receivable 310,000 649,000 (1,862,000) 1,025,000
Prepaid expenses and other current assets (61,000) (117,000) 18,000 (359,000)
Notes receivable 251,000 (660,000) 306,000 (799,000)
Accounts payable (80,000) (866,000) 29,000 691,000
Accrued compensation 43,000 114,000 31,000 315,000
Accrued liabilities (193,000) 711,000 (588,000) 699,000
Customer deposits 375,000 (446,000) (609,000) (736,000)
Unearned revenues (223,000) 533,000 892,000 (859,000)
--------------- ---------------- --------------- ---------------
Net cash provided by/(used in)
operating activities 1,102,000 (1,151,000) (809,000) (4,071,000)
--------------- ---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Assets and liabilities disposed of - 1,715,000 - 1,715,000
Purchase of software, furniture
and equipment (12,000) (91,000) (46,000) (467,000)
--------------- ---------------- --------------- ---------------
Net cash provided by/(used in)investing activities (12,000) 1,624,000 (46,000) 1,248,000
--------------- ---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,281,000 (487,000) 3,037,000 2,492,000
Increase (decrease) in line of credit (757,000) - (447,000) -
Payments on capital lease obligation (9,000) - (28,000) -
Proceeds from Consulting note receivable (167,000) - - -
Cancellation of series C Preferred Stock (850,000) - (850,000) -
--------------- ---------------- --------------- ---------------
Net cash provided by/(used in)financing activities (502,000) (487,000) 1,712,000 2,492,000
--------------- ---------------- --------------- ---------------
Net change in cash and cash equivalents 588,000 (14,000) 857,000 (331,000)
Cash and cash equivalents, beginning of period 470,000 45,000 201,000 362,000
--------------- ---------------- --------------- ---------------
Cash and cash equivalents, end of period $ 1,058,000 $ 31,000 $ 1,058,000 $ 31,000
=============== ================= =============== ===============
Cash paid during period for interest $ 83,000 $ 92,000 $ 238,000 $ 366,000
See notes to consolidated financial statements
7
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements prepared by the Company include the
results of operations of the parent company and its wholly owned subsidiaries.
All inter-company balances and transactions have been eliminated.
In the opinion of management, the financial statements include all material
adjustments necessary for the presentation of the Company's financial position,
results of operations and cash flow. The results of this period are not
necessarily indicative of the results for the entire year.
These financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or classification of
liabilities that might be necessary should the Company be unable to continue to
operate in the normal course of business. See Note 12 to the accompanying
Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform to the 2002
financial statement presentation.
DESCRIPTION OF BUSINESS
The Company is a provider of information technology systems and related
services and consulting services designed to enable home health care providers
to more effectively operate their businesses and compete in the prospective
payment system (PPS) and managed care environments. The Company's focus is to
help home health care providers streamline their operations and better serve
their patients. CareCentric offers several comprehensive software solutions.
Each of these software solutions is designed to enable customers to generate and
utilize comprehensive financial, operational and clinical information.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes revenue under SOP 97-2 as amended by SOP 98-9. The
Company recognizes software license revenue when the following criteria are met:
(1) a signed and executed contract is obtained; (2) delivery has occurred; (3)
the license fee is fixed and determinable; (4) collection is probable; and (5)
remaining obligations under the license agreement are immaterial. The Company
sells and invoices software licenses and maintenance fees as separate contract
elements, except with respect to first year maintenance which is sold in the
form of a bundled turnkey system. The Company has established vendor specific
objective evidence related to the value of maintenance fees. Where applicable,
the Company uses the residual value method to allocate software revenue between
licenses and first year maintenance.
Revenues are derived from the licensing and sub-licensing of software, the
sale of computer hardware, accessories and supplies, implementation and training
products and services, forms and case plans, and software maintenance and
support services. For the nine months ended September 30, 2002, the Company
recorded total revenues of $16.7 million. The Company's core product lines of
8
STAT2 and MestaMed(R) accounted for 34.8% and 54.5%, respectively, of the $16.7
million in revenues.
To the extent that software and services revenues result from software
support, implementation, training and technical consulting services, such
revenues are recognized monthly as the related services are rendered or, for
software support revenues, over the term of the related agreement. To the extent
that software and services revenues result from software licenses, computer
hardware and third-party software revenues, such revenues are recognized when
the related products are delivered and collectability of fees is determined to
be probable, provided that no significant obligation remains under the contract.
Limited amounts of revenues derived from the sale of software licenses requiring
significant modification or customization are recorded based upon the percentage
of completion method using labor hours or contract milestones. Software support
or maintenance allows customers to receive unspecified enhancements and
regulatory data updates in addition to telephone support.
Third-party software and computer hardware revenues are recognized when the
related products are delivered. Software support agreements are generally
renewable for one-year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company generally charges for software implementation, training
and technical consulting services as well as management consulting services on
an hourly or daily basis. The Company offers "tiered pricing" for implementation
of new systems whereby the customer pays a fixed fee for a certain level of
packaged services and daily fees for services beyond the package.
Revenues for post-contract customer support are recognized ratably over the
term of the support period, which is typically one year. Post-contract customer
support fees typically cover incremental product enhancements, regulatory
updates and correction of software errors. Separate fees are charged for
significant product enhancements, new software modules, additional users, and
migrations to different operating system platforms.
Subsequent to delivery, the Company frequently delivers a variety of add-on
software and hardware components. Revenues from these sales are recognized upon
delivery.
In addition to software licenses, software maintenance and support, and
related hardware, the Company also provides a number of ancillary services
including on site implementation and training, classroom training, consulting
and "premium" and after-hours support. Revenues from such products and services
are recognized monthly as such products are delivered and such services are
performed.
PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment are carried at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
SOFTWARE DEVELOPMENT EXPENSES
Costs incurred to establish the technological feasibility of computer
software products are expensed as incurred. The Company's policy is to
capitalize costs incurred between the point of establishing technological
feasibility and general release only when such costs are material. For the nine
months ended September 30, 2002 and the year ended December 31, 2001, the
Company had no capitalized computer software and development costs. Software and
development expenses are accounted for as research and development costs.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
9
INTANGIBLE ASSETS AND LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset's
carrying amount. The application of SFAS No. 121 resulted in an impairment loss
of $11.8 million recorded in the fourth quarter of 2001. See Note 5. Prior to
the impairment adjustment, the intangible assets arising from the
CareCentric/MCS merger on March 7, 2000 were amortized using the straight-line
method over the estimated useful lives of the related assets as more fully
disclosed in Notes 4 and 5. The measurement of the recorded impairment was based
upon comparing the projected undiscounted future cash flow from the use of the
assets against the unamortized carrying value of the assets in the financial
statements.
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations" and effective January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Intangible Assets" and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". These new standards superseded the
Company's previous accounting for intangible assets under SFAS No. 121 as
discussed below in the section Impact of New Accounting Standards.
In adopting SFAS No. 142, the Company ceased amortizing goodwill and
reassessed the remaining life for developed technologies from 6 years to 4
years. An impairment test is required to be performed upon the adoption of SFAS
No. 142 and at least annually thereafter. On an ongoing basis (absent any
impairment indicators requiring interim review), the Company expects to perform
impairment testing at the end of each fiscal year. Impairment adjustments
recognized from future impairment tests, if any, generally are required to be
recognized as operating expenses. In connection with adopting SFAS No. 142, the
Company also reassesses the useful lives and the classification of its
identifiable intangible assets to determine that they continue to be
appropriate.
SFAS No. 144, which became effective for fiscal years beginning after
December 15, 2001, provides a single accounting model for the disposal of
long-lived assets. New criteria must be met to classify the asset as an asset
held for sale. SFAS No. 144 also focuses on reporting the effect of a disposal.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial position or results of operations.
Actual results of operations for the three months and nine months ended
September 30, 2002 and the pro forma results of operations for the three months
and nine months ended September 30, 2001, had the Company applied the provisions
of SFAS No. 142 in that period, are as follows (the impact on amortization
expense is the result of a cessation of amortization of goodwill, the changed
remaining life of developed technologies and the effect of the impairment charge
recorded in the fourth quarter of the year ended December 31, 2001):
10
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ------------------------------------
2002 2001 2002 2001
------------------ ------------------- ----------------- ----------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 182,000 $ (4,899,000) $ (656,000) $ (10,208,000)
Add back: Goodwill amortization - 427,000 - 1,282,000
Add back: Technology amortization 249,000 333,000 747,000 999,000
------------------ ------------------- ----------------- ----------------
Adjusted net income $ 431,000 $ (4,139,000) $ 91,000 $ (7,927,000)
================== =================== ================= ================
NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED
Reported net income $ 0.04 $ (1.12) $ (0.15) $ (2.41)
Goodwill amortization - 0.10 - 0.30
Technology amortization 0.06 0.08 0.17 0.24
------------------ ------------------- ----------------- ----------------
Adjusted net income $ 0.10 $ (0.95) $ 0.02 $ (1.87)
================== =================== ================= ================
Weighted average common shares-
basic and diluted 4,371,000 4,371,000 4,371,000 4,243,000
================== =================== ================= ================
INCOME TAXES
The Company accounts for income taxes using the asset/liability method
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax bases of assets and liabilities. A
valuation allowance reducing the total net deferred tax asset to zero has been
recorded based on management's assessment that it is "more likely than not" that
this net asset is not realizable.
NET INCOME (LOSS) EARNINGS PER SHARE
The Company calculates earnings per share under SFAS No. 128, "Earnings Per
Share." Basic earnings per share exclude any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share for the three
months and nine months ended September 30, 2002 and September 30, 2001 exclude
the effects of options, warrants and conversion rights as they would be
anti-dilutive, and as a result, basic and diluted earnings are the same for the
periods.
STOCK BASED COMPENSATION
Employee stock options are accounted for under SFAS No. 123 (and its
related interpretations) which allows the use of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". See Note 8 to the
Consolidated Financial Statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair value.
Notes receivable and payable: The carrying amounts of the Company's notes
receivable and payable approximates their fair value.
11
SEGMENTS
The Company has one operating segment in continuing operations, which is
the Software Systems segment. As further described in Note 2, the Company
discontinued the Consulting segment during the year ended December 31, 2001.
NOTE 2 -- DISCONTINUED OPERATIONS
The discontinued operations reported in the Company's results of operations
for the three months and nine months ending September 30, 2001 relate to the
Company's Simione Consulting segment, which was sold on September 28, 2001. The
Consulting business, prior to its sale, was the Company's only separately
reported segment of business. Accordingly, the Company no longer reports segment
information. The Consulting business segment was discontinued through a
transaction pursuant to which certain of the assets of the Company's
wholly-owned subsidiary, Simione Consulting, Inc., were sold to Simione
Consultants, L.L.C. ("Simione"), which is owned and controlled by William
Simione, Jr., a director of the Company. The total sales price was approximately
$2.0 million plus the assumption of certain liabilities by Simione. The
Company's net pre-tax loss on the disposal was approximately $2.6 million and
resulted from a write-off of the intangible assets associated with the
Consulting segment as identified at the merger date of March 7, 2000 with MCS.
Selected financial information for the discontinued Consulting segment is
presented in the chart below (dollar amounts in thousands).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
2002 2001 2002 2001
-------------- ----------- ------------- ----------
Operating Revenue $ - $ - $ - $ 2,277
Income before Provision for Income
Taxes - (2,858) - (3,115)
Income from Discontinued Operations
Net of Income Tax $ - $ (2,858) $ - $(3,115)
NOTE 3 - NOTES RECEIVABLE
The Company has certain Notes Receivable of varying maturities which have
resulted from the sale of the assets of the Consulting segment, and financing to
a customer for purchase of a new software system. The Consulting segment Note
Receivable is due from William Simione Jr., currently a director of the Company,
the President and Chief Executive Officer of the acquirer of the Consulting
business, Simione Consulting, LLC, and past Chief Executive Officer of the
Consulting segment when it was part of the Company. The Customer note occurred
in the normal course of business.
The amounts and term of each note are summarized in the table below:
NOTES RECEIVABLE
---------------------------------------
CONSULTING CUSTOMER NOTE TOTAL
---------------------------------------
Balance as of 12-31-01 $ 707,000 $ 137,000 $ 844,000
============= ============ ============
Balance as of 9-30-2002 $ 467,000 $ 71,000 $ 538,000
============= ============ ============
Interest Rate 8.50% 5.65%
12
NOTE 4 - PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment consisted of the following:
DEPRECIATION
SEPTEMBER 30, DECEMBER 31, ESTIMATED
2002 2001 USEFUL LIVES
------------------- ------------------ ----------------
Furniture and Fixtures $ 1,447,000 $ 1,428,000 10 years
Computer equipment and
purchased software 6,264,000 6,237,000 5 years
-------------------- ------------------
7,711,000 7,665,000
Accumulated depreciation (6,557,000) (6,132,000)
-------------------- ------------------
$ 1,154,000 $ 1,533,000
====================== ==================
NOTE 5 - INTANGIBLE ASSETS
As a result of the merger with MCS on March 7, 2000, the Company
capitalized $26.5 million of intangible assets. Those assets were amortized
according to various lives ranging from five to nine years. In accordance with
SFAS No. 121, the Company was required to periodically review the value of its
intangible assets. During the fourth quarter of 2001, the Company's analysis and
review, utilizing the methodology of SFAS No. 121, resulted in an $11.8 million
impairment loss of the intangible assets of the Company. The major reasons for
the impairment were new technologies being integrated in the Company's current
and future products causing its existing product platforms to have reduced
future revenue generation capability, and an expectation that immediate
opportunities for new software sales are lower than were forecasted at the time
of the merger with MCS.
The following table summarizes the Company's changes in account balances
for its intangible assets since the MCS merger on March 7, 2000.
9/30/2002
ORIGINAL ASSETS IMPARMENT ACCUMULATED NET BOOK AMORTIZATION
COST DISPOSED WTITE-DOWN AMORTIZATION VALUE PERIOD
--------------- --------------- ----------------- ---------------- -------------- -------------
Developed technology $ 10,650,000 $ - $ (4,220,000) $ (3,189,000) $ 3,241,000 4 years
Customer base 1,700,000 (510,000) - (341,000) $ 849,000 9 years
Goodwill 14,151,000 (2,906,000) (7,580,000) (3,165,000) $ 500,000
--------------- --------------- ----------------- ---------------- --------------
$ 26,501,000 $ (3,416,000) $ (11,800,000) $ (6,695,000) $ 4,590,000
=============== =============== ================= ================ ==============
Included in Note 1 to the Financial Statements is a table presenting actual
results of operations for the three and nine months ended September 30, 2002 and
pro forma results of operations for the three months and nine months ended
September 30, 2001. The pro forma results for September 30, 2001 present the
effect on earnings had the nonamortization provisions of SFAS No. 142 been
applied and the effect of the write-off of the intangibles recorded in the
fourth quarter of 2001.
NOTE 6 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
On July 1, 2002, the Company completed a recapitalization plan initiated on
April 8, 2002. The recapitalization plan was approved by the common shareholders
of the Company at the June 6, 2002 annual stockholders' meeting. The effect of
the recapitalization plan is summarized below for each note payable and
13
presented comparatively in the following chart at September 30, 2002 and
December 30, 2001.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- -------------------
SHORT TERM:
Line of Credit $ 5,125,000 $ 5,572,000
-------------------- -------------------
$ 5,125,000 $ 5,572,000
==================== ===================
LONG TERM:
Convertible Note Payable - J.E. Reed (1) $ - $ 3,500,000
Note Payable - Mestek - 1,019,000
Convertible Note Payable - B.C. O'Donnell 600,000 600,000
Note Payable - J.E. Reed Capitalized Interest - 184,000
Note Payable - Mestek Capitalized Interest - 40,000
Convertible Note - Mestek 4,063,000
Convertible Note - J.E. Reed 3,612,000
Note Payable - J.E. Reed Accrued Interest 105,000
-------------------- -------------------
$ 8,380,000 $ 5,343,000
==================== ===================
(1) Includes Mestek's participation in the J.E. Reed Facility
LINE OF CREDIT:
On July 12, 2000, the Company entered into a $6.0 million Loan and Security
Agreement facility with Wainwright Bank and Trust Company (the Wainwright
Facility), a commercial bank, under which the Company granted a first priority
position on substantially all of its assets as security. The Wainwright Facility
was used to pay off the line of credit with Silicon Valley Bank, certain
short-term loans from Mestek, Inc. (a related party, See Note 9), and a loan
from David O. Ellis. Borrowings under the Wainwright Facility accrue interest at
the bank's prime rate per annum and require monthly payments of interest. The
Wainwright facility currently matures on October 1, 2003. The Company's
obligations under the Wainwright Facility are guaranteed by Mestek in
consideration of which the Company issued a warrant to Mestek to purchase
104,712 shares of the Company's common stock. As a result of the July 1, 2002
recapitalization, the warrant was cancelled.
CONVERTIBLE NOTE PAYABLE - BARRETT C. O'DONNELL:
On November 11, 1999, Simione borrowed $500,000 from Barrett C. O'Donnell
and $250,000 from David O. Ellis, both on an unsecured basis, and executed
promissory notes in connection therewith. Dr. Ellis and Mr. O'Donnell are
directors of the Company. When the CareCentric/MCS merger was completed on March
7, 2000, the Company succeeded to both of these obligations. The note payable to
Dr. Ellis, which accrued interest at 9% per annum, was paid in full on July 12,
2000 in advance of its August 15, 2000 maturity. The note payable to Mr.
O'Donnell included interest at 9% per annum, was scheduled to mature on May 11,
2002, and required quarterly payments of accrued interest. On August 8, 2000,
the $500,000 note payable to Mr. O'Donnell, together with $100,000 of deferred
salary, was cancelled in exchange for a $600,000 subordinated note, convertible
into CareCentric common stock at a strike price of $2.51 per share, with
interest at 9% per annum and a five-year maturity. In January 2002, this loan
was amended to change the interest rate to prime plus two percent and to change
the terms of payment of interest for 2002 to require that one-half of the
accrued interest be timely paid each quarter and the balance to be paid on
December 31, 2003 or to be converted into an additional convertible note.
14
CONVERTIBLE NOTE PAYABLE - MESTEK:
Prior to the July 1, 2002 recapitalization plan, the Company was obligated
under a) an eighteen month unsecured promissory note in the principal amount of
$1,019,000 payable to Mestek Inc., that earned interest at prime plus one and
one half percent (1.5%), with interest payable semiannually and matured on
September 30, 2003 and b) additional notes payable to Mestek in the amounts of
$40,000, $535,000 and $350,000. These additional notes payable earned interest
at prime plus two percent (2.0%) for the $40,000 note and prime plus one percent
(1.0%) for the $535,000 and $350,000 notes until all principal and accrued
interest amounts were paid in full. These funds were advanced by Mestek to
CareCentric to cover payroll and accounts payable obligations incurred by the
Company, working capital needs of the Company during the period of its
transition of senior lenders from Silicon Valley Bank to Wainwright Bank and
Trust Company, accrued and unpaid interest thereon and the unreimbursed portion
of Mr. Bruce Dewey's salary for the periods from November 9, 1999 to October 31,
2001 when he was Chief Executive Officer of the Company.
On July 1, 2002, under the terms of the recapitalization plan, all notes
payable to Mestek by the Company were consolidated together with a) $1,000,000
of Mestek's previous participation in the J. E. Reed facility, b) accrued unpaid
interest on all notes payable to Mestek aggregating $42,560, c) accrued unpaid
interest on Mestek's participation in the J. E. Reed facility of $33,750, d)
$850,000 of cancelled Mestek Series C Preferred stock, and d) $129,748 of cash
paid on July 1, 2002 by Mestek to the Company to create a single consolidated
$4,000,000 convertible note payable. The terms of the single consolidated Mestek
note are that interest accrues and accumulates at a per annum rate equal to six
and one-quarter percent (6.25%) through September 30, 2004, at which time the
accumulated interest will be capitalized into the related note. After September
30, 2004, the principal and capitalized interest will accumulate interest at the
per annum rate equal to six and one-quarter percent (6.25%) with interest
compounded and payable quarterly. Together with any unpaid principal and accrued
interest, the Mestek note will mature and become payable on June 30, 2007.
Additionally, the new $4.0 million Mestek note and the $3.6 million J. E. Reed
note, together with the value of accrued interest may be converted at the rate
of $1.00 per share into CareCentric common stock exercisable at any time after
July 1, 2002. The new notes are subordinate to the Wainwright Bank $6.0 million
line of credit.
CONVERTIBLE NOTE PAYABLE - J. E. REED:
Prior to the July 1, 2002 recapitalization plan, the Company was obligated
under a financing facility (the J. E. Reed Facility) provided by John E. Reed,
Chairman of CareCentric and the Chairman and Chief Executive Officer of Mestek,
Inc. The J. E. Reed Facility consisted of a $6.0 million subordinated line of
credit, convertible into common stock of the Company at a strike price of $2.51
per share, with interest at 9% per annum and a five-year maturity. The J. E.
Reed Facility was secured by a second position on substantially all of the
Company's assets. At September 30, 2002 and December 31, 2001, borrowings were
equal to $4,331,000 and $3,500,000 respectively, $1,000,000 of which was
participated to Mestek at September 30, 2002 and at December 31, 2001. On
December 31, 2001, the facility was amended to change the interest rate to prime
plus two percent (2.0%) and to change the payment term for unpaid 2001 interest
to require payment on December 31, 2003, or convert the outstanding unpaid
interest to additional convertible notes, in the amount of $184,438 at the
option of Mr. Reed, and in the amount of $40,463 at the option of Mestek, and to
change the terms of payment of interest for 2002 to require that one-half be
timely paid each quarter and the balance be paid on December 31, 2003 or be
converted to additional convertible notes. On March 27, 2002 the Company
received an additional $871,117 advance on the J.E. Reed Facility.
On July 1, 2002, under the terms of the recapitalization plan, all
principal amounts advanced under the J.E. Reed Facility, less the $1,000,000
participation by Mestek, together with interest accrued through December 31,2001
were consolidated into a single consolidated $3,555,555 convertible note
payable. The terms of the single consolidated J.E. Reed note are that interest
accrues and accumulates at a per annum rate equal to six and one-quarter percent
(6.25%) through September 30, 2004, at which time the accumulated interest will
be capitalized into the related note. After September 30, 2004, the principal
and capitalized interest will accumulate interest at the per annum rate equal to
six and one-quarter percent (6.25%) with interest compounded and payable
quarterly. Together with any unpaid principal and accrued interest, the J. E.
Reed note will mature and become payable on June 30, 2007. Additionally, the new
$3.6 million J. E. Reed note, together with the value of accrued interest may be
converted at the rate of $1.00 per share into CareCentric common stock
exercisable at any time after July 1, 2002. The new notes are subordinate to the
Wainwright Bank $6.0 million line of credit.
15
NOTE PAYABLE - J. E. REED ACCRUED INTEREST:
Under the terms of the July 1, 2002 recapitalization, $103,818 of accrued
interest earned on all advances under the J.E. Reed Facility during the period
January 1, 2002 and June 30, 2002 was capitalized into a separate note payable
that accrues and accumulates interest at a per annum rate equal to six and
one-quarter percent (6.25%) through September 30, 2004, with interest compounded
quarterly. After September 30, 2004, the accumulated interest will be
capitalized into the related note and the principal and capitalized interest
will accumulate interest at the per annum rate equal to six and one-quarter
percent (6.25%) with interest compounded and payable quarterly. Together with
any unpaid principal and accrued interest, the separate J. E. Reed accrued
interest note will mature and become payable on June 30, 2007. The J. E. Reed
accrued interest note is subordinate to the Wainwright Bank $6.0 million line of
credit.
CAPITAL LEASE OBLIGATIONS:
The Company is obligated under a number of capital lease obligations
originally entered into by CareCentric related to computer equipment formerly
used in CareCentric's business.
The fair value of the Company's long-term debt is estimated based on the
current interest rates offered to the Company for debt offered under the
liquidity conditions and credit profile of the Company. Management believes the
carrying value of debt and the contractual values of the outstanding letters of
credit approximate their fair values as of September 30, 2002.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its office facilities and certain equipment under
various operating lease agreements. These leases require the Company to pay
taxes, insurance, and maintenance expenses and provide for renewal options at
the then fair market rental value of the property.
CONTINGENCIES
The Company is engaged in various legal and regulatory proceedings arising
in the normal course of business which management believes will not have a
material adverse effect on its financial position or results of operations.
Simione Central Holding, Inc., a subsidiary of CareCentric now known as SC
Holding, Inc. ("SC Holding"), was one of several defendants named in a
"whistleblower" lawsuit related to alleged Medicare fraud filed under the False
Claims Act in the Northern District of Georgia (U.S. ex re. McLendon v.
Columbia/HCA Healthcare Corp., et al., No. 97-VC-0890 (N.D. Ga.)). The lawsuit
involves alleged claims that SC Holding allegedly participated in a conspiracy
with Columbia/HCA and other third parties to bill inflated and fraudulent claims
to Medicare. On July 21, 1999, the Justice Department issued notice that it had
elected not to join in the claims asserted against SC Holding by Donald
McLendon, who is a former employee of an unrelated service provider to
Columbia/HCA. Although the Justice Department joined the suit with regard to
other defendants, it specifically declined to intervene with regard to SC
Holding. In late 2000, CareCentric was advised by Mr. McLendon's attorney that
notwithstanding the declination by the Justice Department, Mr. McLendon intends
to pursue "whistleblower" claims against SC Holding directly. Through November
8, 2002, no such action has been taken and nothing further has been heard from
McLendon's attorney in over one year. Management believes that this claim has
been abandoned. In the event a claim is asserted, however, CareCentric and SC
Holding intend to vigorously defend against it.
In addition, the Company has subleased several offices that it no longer
uses; the Company remains contingently liable for the lease payments on these
subleased offices.
16
NOTE 8 - SHAREHOLDERS' EQUITY
On July 1, 2002, the Company completed a recapitalization plan initiated on
April 8, 2002. The recapitalization plan was approved by the common shareholders
of the Company at the June 6, 2002 annual stockholders' meeting. Under the terms
of the recapitalization plan, the Company's Preferred Stock and Common Stock
warrants were partially restructured. The effect of the recapitalization plan is
summarized below for each class of equity.
The Company's shareholders' equity (all on a split-adjusted basis) is
comprised of the following:
COMMON SHARES - 20,000,000 SHARES AUTHORIZED
Common Shares - 20,000,000 shares authorized, $.001 par value, 4,371,350
shares issued and outstanding as of September 30, 2002 and December 31, 2001.
1,489,853 of such shares were issued on March 7, 2000 to the former MCS common
shareholders. 606,904 of such shares were issued on March 7, 2000 to the former
preferred shareholders and noteholders of CareCentric Solutions, Inc., which
shares were converted from Series A Preferred Stock into CareCentric (formerly
known as Simione Central Holdings, Inc.) common shares in connection with the
merger.
Pursuant to the terms of the July 12, 1999 merger agreement by which
Simione acquired the stock of CareCentric Solutions, Inc., the Company was
required to issue up to an additional 606,904 shares of common stock to the
former preferred shareholders and noteholders of CareCentric Solutions if the
average closing price of the Company's stock for the period October 1, 2000
through December 31, 2000 is not equal to or greater than $15.00 per share.
Since the Company's average closing stock price for the fourth quarter of 2000
was less than $15.00 per share, on March 19, 2001, the Company issued 593,688
shares of its common stock to the former preferred shareholders and noteholders
of CareCentric Solutions. As required by generally accepted accounting
principles, no value was assigned to these shares as it was deemed not to impact
total consideration paid. The Company asserted that it was not required to issue
13,216 additional shares of its common stock as well as 150,740 shares of common
stock that were being held in escrow under the terms of the CareCentric
Solutions Merger Agreement based upon various indemnification and expense
overages claims the Company had against the former CareCentric Solutions
preferred shareholders and noteholders. On May 16, 2001, the Company finalized a
settlement of these claims with the representative of the former CareCentric
Solutions parties pursuant to which 88,586 shares of common stock were released
from escrow and distributed to the former CareCentric Solutions preferred
shareholders and noteholders, the remaining 62,154 escrow shares were cancelled,
no additional shares of common stock will be issued, and the parties executed a
comprehensive settlement agreement.
Pursuant to a comprehensive settlement agreement on June 28, 2001, between
Sterling Star, Inc., Mr. Ted Wade (President of Sterling Star, Inc.) and the
Company, certain disputes related to the acquisition of a product named Tropical
Software were settled. Under the terms of the settlement, 10,000 shares of
common stock originally issued to Sterling Star were returned to the Company and
were cancelled.
PREFERRED STOCK-10,000,000 SHARES AUTHORIZED
Series B Preferred Stock -$.001 par value, 5,600,000 shares issued. The
shares of Series B Preferred Stock are held by Mestek, Inc. (Mestek) and were
issued in consideration of $6,000,000 paid to CareCentric on March 7, 2000, in
the form of cash and debt forgiveness. The Series B Preferred shares, as
originally issued, carried 2,240,000 common share votes (on a split-adjusted
basis) and were entitled to a 9% annual cumulative dividend, among other rights.
In connection with the Company's application for listing on the Nasdaq SmallCap
Market, the Company reached an agreement with Mestek on June 12, 2000, under
which Mestek agreed to allow the aforementioned number of common share votes to
be reduced to 1,120,000 in consideration for the issuance by the Company to
Mestek of a warrant to acquire up to 490,396 shares of CareCentric common stock,
as more fully described below. On March 29, 2002, in connection with the
refinancing commitments made to the Company by Mestek and John E. Reed (as
further described in Note 13), Mestek transferred the voting rights associated
with the Series B Preferred Stock to Mr. Reed. As a result of the July 1, 2002
recapitalization plan, the terms of the Series B Preferred Stock were amended to
provide that each share is convertible into 1.072 shares of common stock.
17
Series C Preferred Stock - $.001 par value, 850,000 shares issued. As a
result of the July 1, 2002 recapitalization plan, the Series C Preferred Stock
was cancelled, and the $850,000 of cash value originally contributed by Mestek
was consolidated into a Mestek convertible Note as more fully described in Note
6 above. $208,000 of accumulated and unpaid dividends through June 30, 2002 on
the Series C Preferred Stock were cancelled and recorded as a reduction in
preferred dividend expense and an increase in net income at June 30, 2002.
Prior to the July 1, 2002 capital restructuring, the shares of Series C
Preferred Stock were held by Mestek and resulted from the conversion at the
March 7, 2000 merger of a pre-existing $850,000 convertible note payable to
Mestek. The Series C Preferred shares carried 170,000 common share votes (on a
split adjusted basis) and were entitled to an 11% annual cumulative dividend,
among other rights.
Series D Preferred Stock - $.001 par value, 398,406 shares issued. The
shares of Series D Preferred Stock are held by John E. Reed and were issued on
June 12, 2000 in consideration of $1.0 million paid to the Company in cash. The
Series D Preferred shares have a 9% annual cumulative dividend, are convertible
into common stock at an initial conversion price of $2.51 per share, limit the
ability to issue dilutive stock options and have voting rights equal to those of
the common stock, among other rights.
Series E Preferred Stock - $.001 par value, 210,000 shares issued under a
restricted stock award. The shares of Series E Preferred Stock are held by John
R. Festa and the rights to those shares were granted on November 10, 2001. The
Series E Preferred shares are entitled to certain voting, dividend, liquidation
and conversion rights.
As of September 30, 2002, the Company had a cumulative preferred dividends
liability of $1,594,700 comprised of $1,384,890 for Series B Preferred shares,
$204,315 for Series D Preferred shares and $ 5,495 for Series E Preferred
shares. Cumulative preferred dividends payable are included in the accrued
liabilities account presented on the Consolidated Balance Sheets in the
accompanying financial statements.
WARRANTS AND OPTIONS
Common Stock Warrants - In connection with the issuance of the Series B
Preferred Stock described above, Mestek received a warrant to acquire up to
400,000 shares of the Company's common stock at a per share exercise price equal
to $10.875. In connection with the waiver by Mestek of certain voting rights
previously granted to it, Mestek received on June 12, 2000 a warrant to acquire
up to 490,396 shares of the Company's common stock for a term of 3 years at a
per share exercise price equal to $3.21. In connection with Mestek's guarantee
of the Company's obligations under the line of credit from Wainwright Bank and
Trust Company, as more fully explained in Note 6 to these Financial Statements,
Mestek received on July 12, 2000 a warrant to acquire up to 104,712 shares of
the Company's common stock for a term of 3 years at a per share exercise price
equal to $2.51. The aforementioned number of shares and per share prices is all
on a split-adjusted basis. Other warrants existing prior to the merger
transaction to acquire up to 25,000 shares of common stock remain outstanding.
As a result of the July 1, 2002 capital restructuring, the warrants issued
to Mestek to purchase 490,396 and 400,000 shares of Company common stock were
cancelled and reissued with an exercise price of $1.00 per share and an
expiration date of June 15, 2004. Additionally, the warrants issued to Mestek to
purchase 104,712 shares of the Company's common stock were cancelled.
The Company's outstanding Warrants as of September 30, 2002 are summarized
in tabular form as follows:
COMMON EXERCISE EXPIRATION
SHARES PRICE DATE
--------------- ---------------------- ---------------------
490,396 $ 1.00 June 15, 2004
400,000 $ 1.00 June 15, 2004
$ 5.00 February 24, 2005
25,000
---------------
915,396
===============
18
Stock Options - Options totaling 1,000 shares were outstanding and vested
under the now discontinued 1997 SCHI NQ (Directors) Plan at an exercise price of
$60.00. Non-plan options totaling 107,453 shares, of which 90,787 are
exercisable, are outstanding at exercise prices ranging from $2.51 to $45.00.
The Simione Central Holding Inc. 1997 Omnibus Equity-Based Plan (the "Plan") is
the only continuing stock option plan of the Company. The Plan offers both
incentive stock options and non-qualified stock options. The Company is
authorized to grant options of up to 900,000 shares of common stock. As of
September 30, 2002, options totaling 486,894 shares were outstanding, of which
173,566 shares are exercisable, at exercise prices ranging from $1.00 to $73.55.
In connection with the Simione/MCS merger on March 7, 2000, Mestek was
granted a series of options to purchase a total of approximately 378,295 shares
of the Company's common stock (on a split-adjusted basis). These options were
cancelled as a result of the July 1, 2002 capital restructuring.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has subleased certain space to Healthfield, Inc. which is a
MestaMed(R) customer and has a significant shareholder who was a former member
of the board of directors of the Company. The original lease and related
sublease expire on December 31, 2002 and require annual sublease payments equal
to the original lease payments of approximately $730,000.
During the year ended December 31, 2001, R. Bruce Dewey was Vice Chairman
of the Board of Directors, and president of the Company and Chief Operating
Officer of Mestek Inc. Mr. Dewey was replaced by Mr. John R. Festa as President
and Chief Executive Officer of the Company in October 2001 and did not stand for
re-election to the Board of Directors in 2002.
Winston R. Hindle, Jr., a director of the Company, is a director of Mestek.
Mestek has certain investments in the Company in the form of notes, convertible
notes, warrants, stock options and preferred stock as described in Notes 6, 8
and 13 to these Financial Statements.
The Company has a note receivable from Simione Consultants, LLC of $467,000
at September 30, 2002. On September 28, 2001, the Company discontinued its
Consulting business segment by closing the sale of certain of the assets of its
wholly-owned subsidiary, Simione Consulting, Inc. ("Consulting") to Simione
Consultants, LLC, which is owned and controlled by William J. Simione, Jr., a
director and former officer of CareCentric. The total sales price was
approximately $2.0 million plus the assumption of certain liabilities. The sale
was made pursuant to an asset purchase agreement. William Simione, Jr. has
resigned as an officer of, but remains a director of, CareCentric. The assets
sold under the agreement included the Consulting accounts receivable, computer
equipment, and miscellaneous prepaid expenses. Consideration received consisted
of approximately $1.0 million in cash and $1.0 million in notes, $770,000 with a
36-month term and $230,000 with a 5-month term. The cash proceeds were used to
pay down CareCentric's line of credit.
As of September 30, 2002, the Company had a promissory note outstanding to
Barrett C. O'Donnell, a director of the Company, as described in Note 6 to these
Financial Statements.
John E. Reed is a director and a significant, but not controlling,
shareholder of the Wainwright Bank and Trust Company which has provided the
Company with a $6.0 million line of credit, as more fully explained in Note 6 to
the Financial Statements.
John E. Reed, Chairman of the Company and Chairman and Chief Executive
Officer of Mestek, has provided the Company with a $3.6 million convertible note
and a $0.1 million accrued interest note as more fully described in Note 6 to
the Financial Statements. Mr. Reed also purchased $1.0 million of the Company's
Series D Preferred Stock on June 12, 2000, as more fully described in Note 8 to
these Financial Statements. Mestek has provided the Company with a $4.0 million
convertible note. The John E. Reed and Mestek notes were originally part of a
$6.0 million line of credit (unrelated to the Wainwright Bank and Trust $6.0
million line of credit described above) which was cancelled as a result of the
July 1, 2002 recapitalization. An independent committee of the Company's Board
19
of Directors, consisting of Barrett C. O'Donnell and David O. Ellis, negotiated
the terms of Mr. Reed's debt and equity investments in the Company. The issuance
of 398,406 shares of Series D Preferred Stock to Mr. Reed for his $1.0 million
equity investment was based on a per share price of $2.51, which was the 5-day
average closing price of CareCentric common stock as of the date of the final
negotiation of the terms of Mr. Reed's purchase.
Warrants were granted in June 2000 and July 2000 by the Company to Mestek
in connection with its waiver of certain voting rights previously granted to it
and in connection with its guarantee of the loan from Wainwright Bank and Trust
Company to the Company. The terms of the warrants (as described in more detail
in Note 8 to these Financial Statements) were based on negotiations by
independent committees of the Boards of Directors of the Company and Mestek.
On August 22, 2002, the Company's common stock was delisted from the Nasdaq
Small Cap Market and has been listed on the Over the Counter Bulletin Board
since that date.
NOTE 10 - LICENSE AGREEMENTS
The Company licenses certain software products from third parties for
incorporation in, or other use with, its products and is obligated to pay
license fees in connection with such products. The Company sublicenses such
products to its customers and collects fees in connection with such
sublicensees.
NOTE 11 - EXECUTIVE COMPENSATION
The Company has entered into an employment agreement with its President and
Chief Executive Officer, Mr. John Festa. Among other specific contents, Mr.
Festa (i) has been granted 210,000 shares of Series E preferred stock, one half
of which vest evenly over the course of three years from his hire date dependent
upon his continued employment as President and CEO and one half of which are
forfeitable pro rata over a three year period if certain financial milestones
are not met, (ii) payment of an annual bonus of up to 50% of his annual salary
based on completion of annual performance objectives, (iii) the possibility of
receiving a special bonus which varies in dollar amount in the event there is a
sale of the Company while Mr. Festa is President and CEO and for nine months
thereafter. The Series E preferred stock was originally valued at approximately
$210,000 and is being amortized as compensation expense over the three-year
vesting period. The amount representing unearned compensation is recorded as an
increase in the stockholders deficit account. For the three and nine months
ended September 30, 2002, approximately $18,000 and $58,000, respectively, was
recorded as current expense associated with earnings under this grant.
NOTE 12 - LIQUIDITY
As disclosed in the financial statements, the Company's operations used
significant amounts of cash in 2001. The Company has a working capital deficit
of $13.3 million at September 30, 2002. During the first six months of 2002, the
Company occasionally used its Wainwright Bank Credit Line and the Reed Credit
Line in order to meet its working capital needs. As a result of the July 1, 2002
recapitalization, the Reed Credit facility was cancelled and as more fully
explained in Note 6 to these financial statements, replaced by long-term
interest deferred notes that mature on September 30, 2007. During the three
months ended September 30, 2002 the company paid back $0.8 million of liability
on the Wainwright Bank Credit Line.
As of October 30, 2002, the Company had unused credit capacity of
approximately $1.3 million from the $6.0 million Wainwright Bank facility. The
Company believes the combination of the funds available from cash to be
generated from future operations and the Wainwright Bank facility will be
sufficient to meet the Company's operating requirements through at least
September 30, 2003, assuming no material adverse change in the operation of the
Company's business. Nevertheless, as revenues increase sufficiently to cover
fluctuations in forward-looking costs and operating expenses, the Company does
not expect to, but may need, the continued support of its majority shareholder
to manage short-term working capital fluctuations. The Company's majority
shareholder has stated he will consider and has the ability to continue to
advance short term working capital loans to the Company on terms similar to his
existing loans with the Company.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
the Private Securities Litigation Reform Act of 1995, and are subject to the
safe harbor created by such sections. When used in this report, the words
"believe", "anticipate", "estimate", "expect", "plans", "intend", "likely",
"will" and similar expressions are intended to identify forward-looking
statements. The Company's future financial performance could differ
significantly from that set forth herein, and from the expectations of
management. Important factors that could cause the Company's financial
performance to differ materially from past results and from those expressed in
any forward looking statements include, without limitation, the inability to
obtain additional capital resources, variability in quarterly operating results,
customer concentration, product acceptance, long sales cycles, long and varying
delivery cycles, the Company's dependence on business partners, emerging
technological standards, changing regulatory standards, inability to retain or
hire experienced and knowledgeable employees, risks associated with
acquisitions, increased regulation of the health care industry, future
consolidation of the health care industry, potential liability in connection
with a Department of Labor investigation or IRS audit, the need to develop new
and enhanced products, product delays and errors, competition, difficulty
protecting intellectual property rights, and the risk factors detailed in the
Company's Registration Statement on Form S-4 (File No. 333-96529) and in the
Company's periodic reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. This Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto. The Company assumes no obligation to update publicly any such
forward-looking statements, whether as a result of new information, future
events, or otherwise.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of the Company's Consolidated Financial Statements. The
following is a brief discussion of the more significant accounting policies and
methods that we follow.
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. The most significant estimates and
assumptions relate to the intangible assets, realization of deferred income
taxes and the adequacy of allowances for returns and doubtful accounts. Actual
amounts could differ significantly from these estimates.
Our critical accounting policies are as follows:
o revenue recognition;
o estimate of allowance for uncollectible accounts; and
o valuation of long-lived and intangible assets and goodwill.
Revenue Recognition
The Company sells its software pursuant to non-exclusive license agreements
which provide for the payment of a one-time license fee. In accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Revenue Recognition", these revenues are recognized when products are delivered
21
and the collectability of fees is probable, provided that no significant
obligations remain under the contract. Revenues derived from the sale of
software products not requiring significant modification or customization are
recognized when products are delivered and collectability of fees is probable,
provided that no significant obligations remain under the contract. The price of
the Company's software varies depending on the number of software modules
licensed and the number of users accessing the system and can range from under
ten thousand dollars to a few million dollars. The Company generally requires
payment of a deposit upon the signing of a customer order as well as certain
additional payments prior to delivery. As a result, the Company's balance sheet
reflects significant customer deposits.
Third-party software and computer hardware revenues are recognized when the
related products are delivered. Software support agreements are generally
renewable for one-year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company generally charges for software implementation, training
and technical consulting services as well as management consulting services on
an hourly or daily basis. The Company offers "tiered pricing" for implementation
of new systems whereby the customer pays a fixed fee for a certain level of
packaged services and daily fees for services beyond the package.
Revenues for post-contract customer support are recognized ratably over the
term of the support period, which is typically one year. Post contract customer
support fees typically cover incremental product enhancements, regulatory
updates and correction of software errors. Separate fees are charged for
significant product enhancements, new software modules, additional users, and
migrations to different operating system platforms.
Estimate of Allowance for Uncollectible Accounts
The Company continuously reviews the status of all its accounts receivable
with its customers for current collectability. The Company recognizes that there
are circumstances under which customers will delay payment beyond the terms
offered by the Company either because of their own payment practices or
temporary situations which need to be resolved before the customer will continue
payment. Reserves for uncollectability are based on various ages of those
accounts receivable past their original due date for collection. The Company
does not write the account off against the reserve for uncollectible account
until all efforts to collect the accounts receivable have been exhausted.
Valuation of Long-Lived and Intangible Assets and Goodwill
The Company assesses the impairment of identifiable intangibles, long-lived
assets and related goodwill and enterprise level goodwill annually or whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could trigger an
impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of the Company's use of the acquired
assets or the strategy for its overall business; and
o significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles,
long-lived assets and related goodwill and enterprise level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the Company measures any impairment based on a projected discounted
cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in the current business model. After
recording a $11.8 million impairment adjustment, net intangible assets amounted
to $5.4 million as of December 31, 2001. See Note 5 of the Notes to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Effect of Discontinued Operations and SFAS No. 142 on Management Discussion and
Analysis
To present a more meaningful analysis of operating performance, the
comparison of the three months and nine months ended September 30, 2002 to
22
September 30, 2001 compares the 2002 reported Financial Statements in the
accompanying Financial Statements to a pro forma 2001 statement of operating
results. The pro forma adjustments for the 2001 financial statements were to
exclude the results of the discontinued operations of the Consulting segment of
CareCentric, Inc. in September of 2001 (see Note 2 to the accompanying Financial
Statements) and to reduce amortization expense for the effect of adopting SFAS
No. 142 (see Note 1 to the accompanying Financial Statements).
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2002
Net Revenues. Revenues (exclusive of the Consulting segment, which was
discontinued in September 2001) were $5.7 million for the three months ended
September 30, 2002 and $5.1 million for the three months ended September 30,
2001, or an increase of 10.8%. The $0.6 million increase was attributable to an
increase in software system sales and related income of $0.2 million to $2.7
million in 2002 from $2.5 million in 2001 and increase in maintenance revenues
of $0.4 million to $3.0 in 2002 from $2.6 million in 2001.
Cost of Revenues. Cost of revenues decreased $0.2 million, or 11.8%, to
$1.7 million in 2002 from $1.9 million for the three months ended September 30,
2001. As a percentage of total net revenues, cost of revenues decreased to 30.8%
in 2002 from 38.7% in 2001. The $0.2 million decrease resulted primarily from
cost cutting and changes in product mix. The decrease as a percentage of total
net revenues is due to the combined impact of many factors including improved
efficiencies in installation procedures and reduced support costs resulting from
lower sales discounts and changes in product mix.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $0.5 million, or 19.1%, to $2.1 million for the three months
ended September 30, 2002 from $2.6 million for the three months ended September
30, 2001. As a percentage of total net revenues, selling, general and
administrative expenses were 36.5% for the three months ended September 30, 2002
and 50.0% for the three months ended September 30, 2001. This decrease was
attributable to synergies derived from cost savings initiatives implemented in
2001 and early 2002. Cost savings were primarily realized through the
centralization of administrative functions and elimination of non-essential
facilities and excess capacity.
Research and Development. Research and development expenses decreased
approximately $0.5 million, or 37.0%, to $0.9 million for the three months ended
September 30, 2002 from $1.4 million for the three months ended September 30,
2001. As a percentage of total net revenues, research and development expenses
decreased to 15.8% for the three months ended September 30, 2002 from 27.7% for
the three months ended September 30, 2001. The decrease in research and
development expenditures was primarily due to the Company's realignment of
research efforts between existing and future platform products. The expenditure
on research and development in the third quarter was unchanged at $0.9 million
for the second quarter. The Company believes the level of expenditure maintained
in the second and third quarters of 2002 is the proper amount to both enhance
and maintain existing products and begin development of new product platforms.
As development of new product platforms advance, the Company expects research
and development expenses to rise above the current 15.8% but remain below the
historic 27.7% of revenue level experienced in 2001.
Amortization and Depreciation. Amortization and depreciation decreased by
$0.6 million to $0.4 million for the three months ended September 30, 2002 from
$1.0 million for the three months ended September 30, 2001. This decrease is
attributable to the net effect of the adoption of SFAS No. 142 and the reduction
in amortization from the write off of the intangibles in the fourth quarter of
2001.
Operating income (Loss). The Company's net income from operations,
reflecting the same assumptions as above for purposes of comparability,
increased from a loss of $1.9 million for the three months ended September 30,
2001 to a net profit of $0.4 million for the three months ended September 30,
2002. This change to profitability from a loss from continuing operations is due
to the combined effect of the increase in revenue, reductions in all components
of expenses including selling, general and administrative, research and
development and amortization expenses.
Other Income (Expense). Interest expense related to borrowings under the
Company's line of credit agreements, loans and capital lease obligations
increased $135,000 to $174,000 for three months ended September 30, 2002
23
compared to $39,000 for the three months ended September 30, 2001. Interest and
other income consist principally of interest income related to customer finance
charges and the Company's short term cash investments. The increase in net
interest expense in 2002 was caused by an increase in interest bearing debt in
2002.
Income Taxes. The Company has not incurred or paid any substantial income
taxes since March 2000. At December 31, 2001, CareCentric had net operating loss
("NOL") carryforwards for federal and state income tax purposes of $36.7
million. Such losses expire beginning in 2008, if not utilized. The Tax Reform
Act of 1986, as amended, contains provisions that limit the NOL and tax credit
carryforwards available to be used in any given year when certain events occur,
including additional sales of equity securities and other changes in ownership.
As a result, certain of the NOL carryforwards may be limited as to their
utilization in any year. The Company has concluded that it is more likely than
not that these NOL carryforwards will not be realized based on a weighing of
available evidence at September 30, 2002, and accordingly, a 100% deferred tax
valuation allowance has been recorded against these assets.
Loss from Operations of Discontinued Segment. The loss of $2.8 million for
the three months ended September 30, 2001 was attributable to the loss on
disposal of $2.6 million and a $0.2 million loss from operations from the
discontinued operations of the Consulting segment. The $2.6 million loss on
disposal was the result of the write off of intangible assets attributed to the
Consulting business at the March 7, 2000 merger date with MCS, Inc.
Cumulative Preferred Dividends. Cumulative preferred dividends for the
three months ended September 30, 2002 was $184,000 compared to $180,000 for the
three months ended September 30, 2002 and 2001 respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Net Revenues. Total net revenues for the nine months ended September 30,
2002 increased by $0.3 million, or 1.6%, to $16.7 million in 2002 from $16.4
million in 2001. Revenues from software systems and related income increased
$0.1 million to $8.3 million in 2002 from $8.2 million in 2001. Revenues from
software maintenance increase $0.2 million, or 2.0%, to $8.4 million in 2002
from $8.2 million in 2001.
Cost of Revenues. Total cost of revenues decreased approximately $1.3
million, or 19.9%, to $5.2 million for the nine months ended September 30, 2002
from $6.5 million for the nine months ended September 30, 2001. As a percentage
of total revenues, cost of revenues decreased to 31.0% in 2002 from 39.4% in
2001. The $1.3 million decrease resulted primarily from cost cutting and changes
in product mix. The decrease as a percentage of total net revenues is mainly the
result of efficiencies in installation and support costs, reduced sales
discounts and changes in product mix.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses decreased $0.7 million to $7.4 million for the nine
months ended September 30, 2002 from $8.1 million for the nine months ended
September 30, 2001. This decrease is principally attributable to the net effect
of synergies derived from centralization of administrative functions and
elimination of non-essential facilities and excess capacity. As a percentage of
total net revenues, selling, general and administrative expenses were 43.9% for
the nine months ended September 30, 2002 compared with 49.1% for the nine months
ended September 30, 2001.
Research and Development Expenses. Research and development expenses
decreased $2.0 million, or 42.0%, to $2.8 million for the nine months ended
September 30, 2002 from $4.8 million for the nine months ended September 30,
2001. As a percentage of total net revenues, these expenses decreased to 16.6%
for the nine months ended September 30, 2002 from 29.1% for the nine months
ended September 30, 2001. As the Company advances development of its next
generation product platforms, research and development expenditures are expected
to increase to a higher level than experienced in the first nine months of 2002.
Amortization and Depreciation. Amortization and depreciation decreased by
$1.6 million to $1.3 million for the nine months ended September 30, 2002 from
$2.9 million for the nine months ended September 30, 2001. This decrease is
attributable to the net effect of the adoption of SFAS No. 142 and the reduction
in amortization from the write off of the intangible assets in the fourth
quarter of 2001.
24
Other Income (Expense). Interest expense related to borrowings under the
Company's line of credit agreements and capital lease obligations increased $0.2
million for the nine months ended September 30, 2002 compared to the nine months
ended September 30, 2001. Interest and other income, which consist principally
of interest income related to customer finance charges and the Company's
short-term cash investments, have decreased by approximately $0.2 million. The
Company expects a net increase in interest expense in 2002 caused by an increase
in interest bearing debt in 2002.
BACKLOG
The Company's backlog associated with its software operations was
approximately $2.2 million at September 30, 2002 compared to $3.2 million at
December 31, 2001. Backlog consists of the unrecognized portion of contractually
committed software license fees, hardware, estimated installation fees and
professional services. The length of time required to complete an implementation
depends on many factors outside the control of the Company, including the state
of the customer's existing information systems and the customer's ability to
commit the personnel and other resources necessary to complete the
implementation process. As a result, the Company may be unable to predict
accurately the amount of revenue it will recognize in any period and therefore
can make no assurances that the amounts in backlog will be recognized in the
next three months.
LIQUIDITY AND CAPITAL RESOURCES
In November 1999, CareCentric, prior to the merger with MCS and when its
pre-merger name was Simione Central Holdings, Inc. (Simione), received $1.6
million of loans from Mestek ($850,000) and two stockholders of Simione
($750,000), Barrett C. O'Donnell and David Ellis, to fund operating needs and
continue the execution of product strategies in the fourth quarter of 1999. The
$850,000 loan from Mestek was converted into 850,000 shares of newly issued
Series C Preferred stock of Simione at the closing of the MCS merger having
170,000 common shares votes and which were entitled to an 11.0% annual
cumulative dividend. The loan from Mr. O'Donnell along with $100,000 in deferred
salary were exchanged for a $600,000 subordinated note, convertible into common
stock at $2.51 per share, with interest at 9% per annum and a maturity date of
August 8, 2005. In January 2002, this loan was amended to change the interest
rate to prime plus two percent and to change the terms of payment of interest
for 2002 to require that one-half of the accrued interest be timely paid each
quarter and the balance to be paid on December 31, 2003 or to be converted into
an additional convertible note. The loan from Dr. Ellis was paid in full on July
12, 2000 from the credit facility provided by Wainwright Bank and Trust Company.
See Note 6 to the accompanying Consolidated Financial Statements.
In February 2000, Simione received an additional $1.0 million of loan
proceeds from Mestek. The loan proceeds were used to fund Simione's operating
needs until completion of the merger with MCS, and carried the same terms and
security as a $3.0 million loan received from Mestek in September 1999. On March
7, 2000, the merger with MCS was completed and Mestek's notes evidencing the
$1.0 million and $3.0 million loans, together with an additional $2.0 million in
cash from Mestek, were converted into Series B Preferred Stock and a warrant to
purchase CareCentric common stock as more fully explained in Note 6 to the
accompanying Consolidated Financial Statements. The consolidation of the
accounts receivable of MCS into the then outstanding balance of Simione's
accounts receivable provided an additional $1.5 million of borrowing capacity on
the $5.0 million bank line of credit established by Simione in September 1999.
Immediately after the Simione/MCS merger on March 7, 2000, the Company had
cash and cash equivalents of $3.5 million and short and long term debt from all
sources of $2.5 million, for a positive net cash/(debt) position of
approximately $1.0 million. In order to supplement its capital resources, the
Company, subsequent to the merger, undertook a search for additional capital
resources. On June 22, 2000, the Company closed a financing with John E. Reed, a
CareCentric director and the chief executive officer of Mestek, of up to $7
million. The financing consisted of $1 million in equity, and a $6 million
subordinated revolving line of credit facility, convertible into common stock of
CareCentric, with a 9% interest rate and five-year maturity. On July 12, 2000,
the Company closed a financing with Wainwright Bank and Trust Company for access
to a $6.0 million revolving line of credit, which was guaranteed by Mestek, Inc.
These three transactions are described in greater detail in Note 6 to the
accompanying Consolidated Financial Statements and resulted in the creation of
the following credit and debt facilities and preferred equity securities:
25
CREDIT AND DEBT AND PREFERRED EQUITY SECURITIES IN JULY 2000
- -----------------------------------------------------------------------------------------------------------
SOURCE FUNDING FORM DATE CLOSED
- ----------------------------------------- ----------------- ------------------------- ------------------
Barrett C. O'Donnell $ 600,000 Convertible Note November 11, 1999
John E. Reed $ 1,000,000 Series D Preferred Stock June 22, 2000
John E. Reed 6,000,000 Line of Credit June 22, 2000
Wainwright Bank and Trust Company 6,000,000 Line of Credit July 12, 2000
-----------------
$13,600,000
=================
Throughout 2000 and 2001, advances were made on the John E. Reed line of
credit such that on December 31, 2001, the outstanding amount under the Credit
Facility was $3.5 million, $1.0 million of which was participated to Mestek, and
the balance of which was retained by Mr. Reed. On December 31, 2001, the
facility was amended to change the interest rate to prime plus two percent, to
change the payment terms for unpaid 2001 interest to require payment at December
31, 2003 or to convert the outstanding unpaid interest to additional convertible
notes in the amount of $184,438 at the option of Mr. Reed, and in the amount of
$40,463 at the option of Mestek, and to change the terms of payment of interest
for 2002 to require that one-half be timely paid each quarter and the balance to
be paid on December 31, 2003 or to be converted to additional convertible notes.
During 2000 and 2001, the Company became obligated under an 18 month
unsecured promissory note in the principal amount of $1,019,000 payable to
Mestek which earned interest at prime plus one and one half percent (1.5%), with
interest payable semiannually and which matured on September 30, 2003. This note
covers funds advanced by Mestek to CareCentric to cover payroll and accounts
payable obligations incurred by the Company during the period of its transition
of senior lenders from Silicon Valley Bank to Wainwright Bank and Trust Company,
accrued and unpaid interest thereon and the unreimbursed portion of Mr. R. Bruce
Dewey's salary for the periods from November 9, 1999 to October 31, 2001.
Also during 2000, 2001 and the first quarter of 2002, the Company incurred
operating losses resulting from numerous factors, including the uncertain
operating condition of its customers due to the negative effects of the current
government limits over home medical cost reimbursement, higher than anticipated
costs of developing, implementing and supporting The Smart Clipboard(R) product
and slower than expected completion of effective integration of the MCS and
Simione Central organizations. In addition, sales revenue in 2000 was lower than
planned in the core MestaMed(R), DME VI and STAT2 products while new sales of
The Smart Clipboard(R) and Tropical products (now discontinued) did not develop
as quickly as projected.
On April 8, 2002, the Company secured two commitments for additional
financing, from existing shareholders John Reed and Mestek. Mr. Reed and Mestek
provided $871,117 and $1,092,000 in short-term debt financing, respectively.
Also on April 8, 2002, the Company initialized a recapitalization of its
interest bearing debt and preferred equity instruments. The recapitalization
plan was approved by the Company's shareholders at the June 6, 2002 annual
stockholders meeting and completed on July 1, 2002. See Notes 6 and 8 to the
accompanying Financial Statements for the impact of the recapitalization plan on
each class of debt and preferred stock. Following the completion of the
recapitalization plan on July 1, 2002, the Company's credit and debt facilities
and related preferred equity securities consist of the following:
26
CREDIT AND DEBT AND PREFERRED EQUITY SECURITIES AT SEPTEMBER 2002
- --------------------------------------------------------------------------------------------------------------
SOURCE FUNDING FORM DATE CLOSED
- ----------------------------------------- ----------------- ------------------------------- -----------------
Barrett C. O'Donnell $ 600,000 Convertible Note maturing November 11, 1999
August, 2005
John E. Reed $ 1,000,000 398,000 shares of convertible June 22, 2000
Series D Preferred Stock
Mestek, Inc. $ 4,000,000 Convertible deferred interest July 1, 2002
Note maturing June 30, 2007
John E. Reed $ 3,555,555 Convertible deferred interest July 1, 2002
Note maturing June 30, 2007
John E. Reed $ 103,818 Capitalized deferred interest July 1, 2002
Note maturing June 30, 2007
Wainwright Bank and Trust Company 6,000,000 Line of Credit July 12, 2000
-----------------
$15,259,373
=================
The John E. Reed and Mestek, Inc. debt and equity amounts have all been fully
funded to the Company as of September 30, 2002. During the third quarter, the
Company paid off $0.8 million of the Wainwright Bank and Trust Company line of
credit resulting in an outstanding balance of $5.1 million at September 30,
2002.
During the month of October 2002, the Company has paid off an additional
$0.4 million on the Wainwright Bank line of credit, resulting in $1.7 million of
unused credit capacity as of November 8, 2002. The Company believes the
combination of the funds available from cash to be generated from future
operations and the Wainwright Bank facility will be sufficient to meet the
Company's operating requirements through at least September 30, 2003, assuming
no material adverse change in the operation of the Company's business.
Nevertheless, until revenues increase sufficiently to cover fluctuations in
forward-looking costs and operating expenses, the Company may need the continued
support of its majority shareholder to manage short-term working capital
fluctuations. The Company's majority shareholder has stated he will consider and
has the ability to continue to advance short term working capital loans to the
Company on terms similar to his existing credit facility. See also Note 12 to
Financial Statements.
The table below summarizes the Company's debt and other contractual
obligations at September 30, 2002:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 2-3 YEARS 4 - 5 YEARS
---------------- ---------------------------------------------------
Long-Term Debt $ 8,380,000 $ - $ 600,000 $ 7,780,000
Capital Lease Obligations 7,500 7,500 - -
Operating Leases 2,164,000 1,121,000 1,034,000 9,000
Line of Credit 5,125,000 5,125,000 - -
Other Long-Term Obligations 1,327,000 1,027,000 300,000 -
---------------- ---------------- --------------- ------------------
Total Contractual Cash
Obligations $ 17,003,500 $ 7,280,500 $ 1,934,000 $ 7,789,000
================ ================ =============== ==================
27
As of September 30, 2002, the Company had negative working capital of $13.3
million and cash equivalents of $1.1 million. The Company's current liabilities
as of September 30, 2002 include customer deposits of $1.5 million and unearned
revenues of $4.9 million.
Net cash provided by operating activities for the three months ended
September 30, 2002 was $1.1 million compared to a use of cash by operating
activities for the three months ended September 30, 2001 of $1.2 million. Net
cash used in operating activities for the nine months ended September 30, 2002
and September 30, 2001 was $0.8 million and $4.1 million, respectively.
Cash flows from financing activities during the nine months ended September
30, 2002 include John E. Reed and Mestek, Inc. borrowings made before the
recapitalization plan was completed on July 1, 2002.
Inflation has not had, and is not expected to have, a material impact on
the Company's operations. If inflation increases, the Company will attempt to
increase its prices to offset increased expenses. No assurance can be given,
however, that the Company will be able to adequately increase its prices in
response to inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 141 addresses financial accounting and reporting for all business
combinations and requires that all business combinations entered into subsequent
to June 2001 be recorded under the purchase method. This statement also
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 142 addresses
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets at acquisition. This statement also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. These statements were adopted by the Company on
January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized. In the
place of amortization, the Company is required to periodically review the
valuation of the Company's intangible assets using a discounted cash flow
estimation approach. Following the accounting for impairment discussed
immediately below, which has been made under the rules of SFAS No. 121, the
effect of adopting SFAS No. 141 and 142 was limited to changes in amortization
expense for the periods after December 31, 2001. Additionally, the assembled
workforce intangible asset has been recharacterized as goodwill, which will no
longer be amortized under the rules of SFAS No. 142.
Accounting for impairment. For the years ended December 31, 2001, 2000 and
1999, the Company reported its accounting for intangible assets under SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30. Under the rules of SFAS No. 121, the Company performs periodic
analysis to determine if the Company's intangible assets have been impaired
using a combination of discounted and undiscounted estimated cash flow
estimations. In the fourth quarter of 2001, the Company determined that the
combination of new technologies being integrated in the Company's current and
future products would result in its existing product platforms having smaller
future revenue generation capability. Additionally, the Company determined that
the continued support of existing products while migrating to new technology
platforms would result in a lower estimated cash value to the Company of
existing products. The resulting impairment to the intangible assets of the
Company was $11.8 million. As further detailed in Note 5 of the Financial
Statements, the intangible assets of the Company, after the impairment charge,
will be Developed Technologies, Customer Base and Assembled Workforce.
On October 3, 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that replaced SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of." The primary objectives of this project were to develop one
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sales and to address significant
implementation issues. The accounting model for long-lived assets to be disposed
of by sale applies to all long-lived assets, including discontinued operations,
and replaces the provisions of the Accounting Principles Board (APB Opinion No.
30, Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business) for the disposal of segments of a business. SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to determine whether such assets should be
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
28
include amounts for operating losses that have not yet occurred. The provisions
of SFAS No. 144 were adopted by the Company effective January 1, 2002. The
impact of those provisions were not material to the Company's statement of
financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds FASB Statement
No. 44, Accounting for Intangible Assets of Motor Carriers and amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
does not believe SFAS No. 145 will have a material effect on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal. SFAS No. 146 eliminates the definition and requirements
for recognition of exit costs in EITF Issue No. 94-3. SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe SFAS No. 146
will have a material effect on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of September 30, 2002, the Company's obligations include variable rate
notes payable and a line of credit bank note with aggregate principal balances
of approximately $13.5 million, which mature at various dates through 2007. The
Company is exposed to the market risk of significant increases in future
interest rates. Each incremental point change in the prime interest rate would
correspondingly increase or decrease the Company's interest expense by
approximately $53,250 per year.
At September 30, 2002, the Company had accounts receivable of approximately
$5.7 million net of an allowance for doubtful accounts of $1.3 million. The
Company is subject to a concentration of credit risk because most of the
accounts receivable are due from companies in the home health industry.
ITEM 4. CONTROLS AND PROCEDURES.
In the 90-day period before the filing of this report, the chief executive
and chief financial officers of the Company have evaluated the effectiveness of
the Company's disclosure controls and procedures. These disclosure controls and
procedures are those controls and other procedures management maintains, which
are designed to insure that all of the information required to be disclosed by
the Company in all its periodic reports filed with the SEC is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in its reports filed or submitted under the
Securities Exchange Act of 1934 is accumulated and communicated to Company
management, including the chief executive and chief financial officer of the
Company, as appropriate to allow those persons to make timely decisions
regarding required disclosure.
Subsequent to the October 25, 2002,when the disclosure controls and
procedures were evaluated, there have not been any significant changes in the
Company's disclosure controls or procedures or in other factors that could
significantly affect such controls or procedures. No significant deficiencies or
material weaknesses in the controls or procedures were detected, so no
corrective actions needed to be taken.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither CareCentric nor any of its subsidiaries is currently a party to any
legal proceedings which would be material to the business or financial condition
of the Company on a consolidated basis.
Simione Central Holding, Inc., a subsidiary of CareCentric now known as SC
Holding, Inc. ("SC Holding") was one of several defendants named in a
"whistleblower" lawsuit related to alleged Medicare fraud filed under the False
Claims Act in the Northern District of Georgia (U.S. ex re. McLendon v.
Columbia/HCA Healthcare Corp., et al., No. 97-VC-0890 (N.D. Ga.)). The lawsuit
involves alleged claims that SC Holding allegedly participated in a conspiracy
with Columbia/HCA and other third parties to bill inflated and fraudulent claims
to Medicare. On July 21, 1999, the Justice Department issued notice that it had
elected not to join in the claims asserted against SC Holding by Donald
McLendon, who is a former employee of an unrelated service provider to
Columbia/HCA. Although the Justice Department joined the suit with regard to
other defendants, it specifically declined to intervene with regard to SC
Holding. In late 2000, CareCentric was advised by Mr. McLendon's attorney that
notwithstanding the declination by the Justice Department, Mr. McLendon intends
to pursue "whistleblower" claims against SC Holding directly. Through November
8, 2002, no such action has been taken and nothing further has been heard from
McLendon's attorney for over one year. Management believes that this claim has
been abandoned. In the event a claim is asserted, however, CareCentric and SC
Holding intend to vigorously defend against it.
Item 2. Change in Securities.
On August 22, 2002, the Company's common stock was delisted from the Nasdaq
SmallCap Market and has been listed on the Over the Counter Bulletin Board since
that date. The delisting from Nasdaq was the result of certain financial
indicators, as reported in the Company's December 31, 2001 financial statements,
were below applicable minimum requirements issued by Nasdaq to maintain listing
on the Nasdaq SmallCap Market. The Company's trading price during 2002 and its
write-off of certain non-cash, impaired intangible assets contributed to the
delisting by Nasdaq.
On July 1, 2002, the Company cancelled and reissued warrants to purchase
490,396 and 400,000 shares of its common stock to Mestek, Inc., pursuant to the
terms of the recapitalization described in more detail in Notes 6 and 8 to the
Financial Statements included herein. The reissued warrants have an exercise
price of $1.00 per share and expire in June 2004. In reissuing warrants without
registration, the Company takes the position that this transaction does not
constitute an "offer", "offer to sell" or "sale" under Section 5 of the
Securities Act of 1933, and also relies on the on the exemption from
registration provided in Section 4(2) of the Securities Act of 1933, as amended,
and Rule 506 of Regulation D promulgated thereunder. Mestek, the recipient of
the warrants, is an accredited investor as defined in Regulation D, is a major
shareholder of the Company, and has complete access to financial and other
information pertaining to the Company.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
30
3.1 Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 3.4 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 (File No. 000-22162)).
3.2 Certificate of Ownership and Merger of Simione Central
Holdings, Inc. with and into CareCentric Inc. (Incorporated
by reference to Exhibit 3.2 of the Company's Current Report
on Form 8-K dated as of January 31, 2001 (file No.
000-22162)).
3.3* Bylaws of the Company dated October 25, 2002.
3.4 Certificate of Designations, Preferences and Rights of
Series E Preferred Stock of the Company (Incorporated by
reference to Exhibit 3.4 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 (File No.
000-22162)).
3.5** Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series B Preferred Stock of the
Company.
3.6** Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series D Preferred Stock of the
Company.
10.47** Promissory Note in the original principal amount of
$4,000,000 dated as of July 1, 2002 from the Company and
certain of its subsidiaries in favor of Mestek, Inc.
10.48** Secured Convertible Credit Facility and Security Agreement
dated as of July 1, 2002 by and between the Company, SC
Holding, Inc., CareCentric National, LLC and Mestek, Inc.
10.49** Promissory Note in the original principal amount of
$3,555,555 dated as of July 1, 2002 from the Company and
certain of its subsidiaries in favor of John E. Reed.
10.50** Amended and Restated Secured Convertible Credit Facility and
Security Agreement dated as of July 1, 2002 by and between
the Company, SC Holding, Inc., CareCentric National, LLC and
John E. Reed.
10.51** Warrant for 400,000 shares of common stock dated as of July
1, 2002 by and between the Company and Mestek, Inc.
10.52** Warrant Exchange Agreement with respect to 400,000 shares of
common stock dated as of July 1, 2002 by and between the
Company and Mestek, Inc.
10.53** Warrant for 490,396 shares of common stock dated as of July
1, 2002 by and between the Company and Mestek, Inc.
10.54** Warrant Exchange Agreement with respect to 490,396 shares of
common stock dated as of July 1, 2002 by and between the
Company and Mestek, Inc.
10.55** Registration Rights Agreement dated as of July 1, 2002 by
and between the Company and Mestek, Inc.
10.56** Promissory Note in the original principal amount of $103,818
dated as of July 1, 2002 from the Company and certain of its
subsidiaries in favor of John E. Reed.
------------------
* Filed herewith
** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
31
(b) Reports on Form 8-K:
On April 30, 2002, the Company filed a Form 8-K regarding a
letter from Nasdaq indicating that certain financial indicators
as reported in the December 31, 2001 financial statements were
below applicable minimum requirements issued by Nasdaq to
maintain listing on the Nasdaq SmallCap Market.
On August 20, 2002, the Company filed a Form 8-K regarding the
delisting of the Company's common stock from the Nasdaq SmallCap
Market. Effective August 22, 2002, the Company's common stock has
traded on the Over the Counter Bulletin Board.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARECENTRIC, INC.
Dated: November 11, 2002 By: /s/ George M. Hare
--------------------------------
GEORGE M. HARE
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
32
1560966
CareCentric, Inc., Certification for Quarterly Report on Form 10-Q
I, John R. Festa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CareCentric, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ John R. Festa
--------------------------------------
John R. Festa
President and Chief Executive Officer
CareCentric, Inc., Certification for Quarterly Report on Form 10-Q
I, George M. Hare, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CareCentric, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ George M. Hare
-----------------------------------------
George M. Hare
Chief Financial Officer