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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 JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Outstanding at
Class 7/31/03
--------- --------------
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 - June 30, 2003 (unaudited) and December
31, 2002. Consolidated Statements of Operations - Three Months and Six
Months ended June 30, 2003 and 2002 (unaudited).
Consolidated Statements of Shareholders' Equity - Six months ended
June 30, 2003 (unaudited).
Consolidated Statements of Cash Flows - Three Months and Six months
ended June 30, 2003 and 2002 (unaudited).
Notes to Consolidated Financial Statements - June 30, 2003
(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
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 accounting
principles generally accepted in the United States of America 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.
1
CARECENTRIC, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
----------------- -----------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,000,000 $ 826,000
Accounts receivable, net of allowance for doubtful
accounts of $969,000 and $1,307,000 respectively 4,042,000 4,632,000
Prepaid expenses and other current assets 733,000 696,000
Notes receivable 128,000 215,000
----------------- -----------------
Total current assets 5,903,000 6,369,000
Purchased software, furniture and equipment, net 819,000 1,036,000
Intangible assets, net 3,743,000 4,308,000
Long term notes receivable 380,000 194,000
----------------- -----------------
Total assets $ 10,845,000 $ 11,907,000
================= =================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 3,325,000 $ 4,525,000
Accounts payable 1,487,000 1,584,000
Accrued compensation expense 477,000 556,000
Accrued liabilities 6,074,000 6,113,000
Customer deposits 1,235,000 1,495,000
Unearned revenues 4,464,000 4,223,000
----------------- -----------------
Total current liabilities 17,062,000 18,496,000
Accrued liabilities, less current portion - 150,000
Note payable long-term 8,776,000 8,520,000
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 $1.39 6,000 6,000
Series D Preferred, $.001 par value;
398,000 issued and outstanding; liquidation value $3.20 - -
Series E Preferred, $.001 par value;
210,000 issued and outstanding; liquidation value $1.04 - -
Common stock, $.001 par value; 20,000,000 shares authorized;
4,371,350 shares issued and outstanding at June 30, 2003
and December 31, 2002 4,000 4,000
Unearned compensation (99,000) (134,000)
Additional paid-in capital 20,430,000 20,430,000
Stock warrants 1,000,000 1,000,000
Accumulated deficit (36,334,000) (36,565,000)
----------------- -----------------
Total shareholders' deficit (14,993,000) (15,259,000)
----------------- -----------------
Total liabilities and shareholders' deficit $ 10,845,000 $ 11,907,000
================= =================
See notes to consolidated financial statements
2
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2003 2002 2003 2002
--------------- -------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $ 5,627,000 $ 5,848,000 $ 11,105,000 $ 11,101,000
Costs and expenses:
Cost of revenues 1,739,000 1,785,000 3,562,000 3,460,000
Selling, general and 2,325,000 2,589,000 4,541,000 5,288,000
administrative
Research and development 877,000 942,000 1,713,000 1,889,000
Amortization and depreciation 394,000 423,000 789,000 848,000
--------------- -------------- --------------- ---------------
Total costs and expenses 5,335,000 5,739,000 10,605,000 11,485,000
--------------- -------------- --------------- ---------------
Income (loss) from operations 292,000 109,000 500,000 (384,000)
Other income (expense):
Interest expense (210,000) (153,000) (383,000) (322,000)
Interest and other income 106,000 15,000 449,000 13,000
--------------- -------------- --------------- ---------------
Income (loss) before taxes 188,000 (29,000) 566,000 (693,000)
--------------- -------------- --------------- ---------------
Income tax benefit (expense) - - (23,000) -
--------------- -------------- --------------- ---------------
Net Income (loss) 188,000 (29,000) 543,000 (693,000)
--------------- -------------- --------------- ---------------
Cumulative Preferred Dividends (157,000) 34,000 (312,000) (146,000)
--------------- -------------- --------------- ---------------
Net Income (loss) available to common
shareholders $ 31,000 $ 5,000 $ 231,000 $ (839,000)
=============== ============== =============== ===============
Net Income (loss) per share - basic and $ 0.04 $ (0.01) $ 0.12 $ (0.16)
diluted =============== ============== =============== ==-============
Net Income (loss) per share - basic and
diluted available to common shareholders $ 0.01 $ 0.00 $ 0.05 $ (0.19)
=============== ============== =============== ===============
Weighted average common shares -
basic and diluted 4,371,000 4,371,000 4,371,000 4,371,000
=============== ============== =============== ===============
See notes to consolidated financial statements
3
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(unaudited)
COMMON PREFERRED UNEARNED ADDITIONAL TOTAL
-------------------- --------------------- COMPEN- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES STOCK SHARES STOCK SATION CAPITAL WARRANTS DEFICIT DEFICIT
--------- ---------- ---------- ---------- ---------- ----------- ---------- ------------- -------------
Balance at
December 31, 2002 4,371,000 $4,000 6,208,000 $6,000 $(134,000) $20,430,000 $1,000,000 $(36,565,000) $(15,259,000)
--------- ---------- ---------- ---------- ---------- ----------- ---------- ------------- -------------
Amortization of
unearned
compensation 35,000 35,000
Net income 231,000 231,000
--------- ---------- ---------- ---------- ---------- ----------- ---------- ------------- -------------
Balance at
June 30, 2003 4,371,000 $4,000 6,208,000 $6,000 $ (99,000) $20,430,000 $1,000,000 $(36,334,000) $(14,993,000)
========= ========== ========== ========== ========== =========== ========== ============= =============
See notes to Consolidated Financial Statements
4
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 31,000 $ 5,000 $ 231,000 $ (839,000)
-------------- -------------- -------------- --------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Provision for doubtful accounts - 87,000 - 244,000
Amortization and depreciation 394,000 423,000 789,000 848,000
Stock based compensation charge to earnings 18,000 18,000 35,000 41,000
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 276,000 (764,000) 589,000 (2,172,000)
Prepaid expenses and other current assets 79,000 60,000 (37,000) 80,000
Notes receivable (66,000) 15,000 (186,000) 55,000
Accounts payable (2,000) (338,000) (97,000) 109,000
Accrued compensation (3,000) 39,000 (79,000) (11,000)
Accrued liabilities (50,000) (248,000) (189,000) (415,000)
Customer deposits (145,000) (1,010,000) (260,000) (984,000)
Unearned revenues (96,000) 989,000 241,000 1,115,000
-------------- -------------- -------------- --------------
Net cash provided by / (used in) operating
activities 436,000 (724,000) 1,037,000 (1,929,000)
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of software, furniture and equipment - (13,000) (6,000) (34,000)
-------------- -------------- -------------- --------------
Net cash provided by / (used in) investing
activities - (13,000) (6,000) (34,000)
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 129,000 756,000 256,000 1,756,000
Increase (decrease) in line of credit (800,000) (85,000) (1,200,000) 310,000
Payments on capital lease obligation - 9,000 - -
Proceeds from Consulting note receivable 52,000 71,000 87,000 167,000
-------------- -------------- -------------- --------------
Net cash provided by / (used in)
financing activities (619,000) 751,000 (857,000) 2,233,000
-------------- -------------- -------------- --------------
Net change in cash and
cash equivalents (183,000) 14,000 174,000 270,000
Cash and cash equivalents, beginning of period 1,183,000 457,000 826,000 201,000
-------------- -------------- -------------- --------------
Cash and cash equivalents, end of period $1,000,000 $ 471,000 $ 1,000,000 $ 471,000
============== ============== ============== ==============
Cash paid during period for interest $ 28,000 $ 74,000 $ 91,000 $ 155,000
See notes to consolidated financial statements
5
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 11 to the accompanying
Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform to the 2003
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 six months ended June 30, 2003, the Company recorded
total revenues of $11.1 million. The Company's core product lines of STAT2 and
6
MestaMed(R) accounted for 25.8% and 53.2%, respectively, of the $11.1 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 six
months ended June 30, 2003 and the year ended December 31, 2002, 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.
7
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 4. 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 3 and 4. 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.
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 six
months ended June 30, 2003 and June 30, 2002 include the effects of options,
warrants and conversion rights as if they would be dilutive.
STOCK BASED COMPENSATION
At June 30, 2003, the Company has two stock-based employee compensation
plans, which are described in Note 7. The Company accounts for those plans under
the recognition and measurement principles of Accounting Principle Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
8
THREE-MONTH PERIODS ENDED SIX-MONTH PERIODS ENDED
JUNE 30 JUNE 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss), as reported $ 31,000 $ 5,000 $ 231,000 $ (839,000)
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects $ (28,000) $ (79,000) $ (57,000) $ (158,000)
------------ ------------ ------------ ------------
Pro forma net income $ 3,000 $ (74,000) $ 174,000 $ (997,000)
============ ============ ============ ============
Earnings per share:
Basic--as reported $ 0.04 $ (0.01) $ 0.12 $ (0.16)
============ ============ ============ ============
Basic--pro forma $ 0.00 $ ( 0.02) $ 0.04 $ (0.23)
============ ============ ============ ============
Diluted--as reported $ 0.04 $ (0.01) $ 0.12 $ (0.16)
============ ============ ============ ============
Diluted--pro forma $ 0.00 $ ( 0.02) $ 0.04 $ (0.23)
============ ============ ============ ============
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 notes payable: The carrying amounts of the Company's
notes receivable and notes payable approximate their fair value assuming
interest rates consistent with what the Company could obtain in the open market.
SEGMENTS
The Company has one operating segment in continuing operations, which is
the Software Systems segment.
NOTE 2 - NOTES RECEIVABLE
The Company has certain notes receivable of varying maturities, which have
resulted from the sale of the assets of the Consulting segment in September
2001, and financing to customers for purchase of new software systems. 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 notes 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 12-31-02 $ 409,000 $ - $ 409,000
============= ============== ==============
Balance as of 6-30-03 $ 321,000 $ 187,000 $ 508,000
============= ============== ==============
Interest Rate 8.50% 6.00%
NOTE 3 - PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment consisted of the following:
9
DEPRECIATION
JUNE 30, DECEMBER 31, ESTIMATED
2003 2002 USEFUL LIVES
---------------- --------------- ----------------
Furniture and Fixtures $ 1,451,000 $ 1,447,000 10 years
Computer equipment and purchased software 6,291,000 6,288,000 5 years
---------------- ---------------
7,742,000 7,735,000
Accumulated depreciation (6,923,000) (6,699,000)
---------------- ---------------
$ 819,000 $ 1,036,000
================ ===============
NOTE 4 - 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 four 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.
JUNE 30, 2003
ORIGINAL ASSETS IMPAIRMENT ACCUMULATED NET BOOK AMORTIZATION
COST DISPOSED WRITE-DOWN AMORTIZATION VALUE PERIOD
---------------- --------------- ----------------- ---------------- ---------------- ------------
Developed
technology $ 10,650,000 $ - $ (4,220,000) $ (3,937,000) $ 2,493,000 4 years
Customer base 1,700,000 (510,000) - (440,000) 750,000 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) $ (7,542,000) $ 3,743,000
================ =============== ================= ================ ================
NOTE 5 - 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. In accordance
with the terms of the recapitalization plan and the convertible note agreements
with B. C. O'Donnell, Mestek, Inc. and J. E. Reed, interest earned on the notes
is accumulated since July 1, 2002 and included in the balances presented in the
following chart at June 30, 2003 and December 31, 2002.
10
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
JUNE 30, 2003 DECEMBER 31, 2002
--------------------- ----------------------
SHORT TERM:
Line of Credit $ 3,325,000 $ 4,525,000
===================== ======================
LONG TERM:
Convertible Payable - B. C. O'Donnell $ 638,000 $ 619,000
Convertible Note - Mestek 4,250,000 4,126,000
Convertible Note - J.E. Reed 3,778,000 3,668,000
Note Payable - J.E. Reed Accrued Interest 110,000 107,000
--------------------- ----------------------
$ 8,776,000 $ 8,520,000
===================== ======================
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 8), 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. In
December 2002, Mr. O'Donnell agreed to adjust the terms of the Note Payable to
provide consistent treatment with the Mestek and J.E. Reed convertible notes
payable as existing after the July 1, 2002 recapitalization plan. The effect of
this adjustment was to reduce the interest rate on the note payable to a fixed
rate of 6.25% and to defer all interest earned from July 1, 2002 through June
30, 2004 at which time the accumulated interest totaling $75,000 will be
capitalized into the principal of the note payable. After June 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 beginning on September 30, 2004. Together with any unpaid
principal and accrued interest, the Barrett C. O'Donnell note will mature and
become payable on June 30, 2007. Additionally, the $600,000 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 subordinated to the Wainwright Bank $6.0 million line of credit.
CONVERTIBLE NOTE PAYABLE - MESTEK:
Prior to the July 1, 2002 recapitalization plan, the Company was obligated
under a) an 18-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
11
$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 e) $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 June 30, 2004, at which time the
accumulated interest will be capitalized into the related note. After June 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 beginning on September 30, 2004. 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 subordinated 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 December 31, 2002 and 2001, borrowings were equal to
$4,668,000 and $3,500,000 respectively, $1,000,000 of which was participated to
Mestek at December 31, 2002 and 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 June 30, 2004, at which time the accumulated interest will be
capitalized into the related note. After June 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
beginning on September 30, 2004. 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 subordinated to the Wainwright Bank $6.0 million line of credit.
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
12
from 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 subordinated to the Wainwright Bank $6.0 million line
of credit.
CAPITAL LEASE OBLIGATIONS:
The Company has no capital lease obligations at June 30, 2003.
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 June 30, 2003.
Cash paid interest was $91,000 and $155,000 during the six months ended
June 30, 2003 and 2002 respectively.
Maturities of long-term debt in each of the next five years are as follows
in thousands:
2004 $ -
2005 -
2006 -
2007 8,776
2008 -
----------
Total $ 8,776
==========
NOTE 6 - 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
13
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 July 31,
2003, 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.
NOTE 7 - 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, $.001 par value, 4,371,350
shares issued and outstanding as of June 30, 2003 and December 31, 2002.
1,489,853 of such shares were issued on March 7, 2000 to the former MCS common
shareholders. 606,904 of such shares were issued on March 7, 2000 to the former
preferred shareholders and noteholders of CareCentric Solutions, Inc., which
shares were converted from Series A Preferred Stock into CareCentric (formerly
known as Simione Central Holdings, Inc.) common shares in connection with the
merger.
PREFERRED STOCK-10,000,000 SHARES AUTHORIZED
Series B Preferred Stock -$.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 SmallCasp
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 12), 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.
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
5 above. Accumulated and unpaid dividends of $208,000 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
14
the common stock, among other rights. As a result of the July 1, 2002
recapitalization plan, the Series D Preferred Stock conversion price per share
was amended from $2.51 to $1.00.
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 have a 3.5% annual non-cumulative dividend, are
convertible into common stock at an initial conversion price of $1.00 per share
and have voting rights equal to those of common stock, among other rights.
As of June 30, 2003, the Company had a cumulative preferred dividends
liability of $2,071,500, comprised of $1,790,000 for Series B Preferred shares,
$274,000 for Series D Preferred shares and $7,500 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 5 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.
At June 30, 2003, the Company had outstanding warrants to purchase shares
of the Company's common stock as follows:
BEFORE JULY 1, 2002 AFTER JULY 1, 2002
DESCRIPTION OF WARRANTS EXERCISE PRICE EXPIRATION DATE EXERCISE PRICE EXPIRATION DATE
- ----------------------- -------------- --------------- -------------- ---------------
25,000 - Barrett C. O'Donnell $ 5.00 February 24, 2005 $ 5.00 February 24, 2005
400,000 - Mestek, Inc. $10.88 March 7, 2003 $ 1.00 June 15, 2004
490,396 - Mestek, Inc. $ 3.21 June 30, 2003 $ 1.00 June 15, 2004
104,712 - Mestek, Inc. $ 2.51 July 12, 2003 Cancelled Cancelled
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. 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 June
30, 2003, options totaling 442,272 shares were outstanding, of which 310,938
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.
15
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company had 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 expired on December 31, 2002 and required annual sublease payments
equal to the original lease payments of approximately $730,000.
John E. Reed, Stewart B. Reed and Winston R. Hindle, Jr. are directors of
the Company and directors 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 5, 7 and 12 to these Financial Statements.
The Company has a note receivable from Simione Consultants, LLC of $321,000
at June 30, 2003. 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 June 30, 2003, the Company had a promissory note outstanding to
Barrett C. O'Donnell, a director of the Company, as described in Note 5 to these
Financial Statements. Mr. O'Donnell also owns a warrant for the purchase of
25,000 shares of common stock of the Company at an exercise price of $5.00 per
share.
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 5 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 5 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 7 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
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's common stock as of the date of the final
negotiation of the terms of Mr. Reed's purchase.
NOTE 9 - 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 10 - EXECUTIVE COMPENSATION
The Company entered into an employment agreement with its President and
Chief Executive Officer, John Festa on October 31, 2001. Under the agreement,
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) is entitled to payment of an annual bonus of up to
50% of his annual salary based on completion of annual performance objectives,
16
and (iii) is entitled to 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 six months ended June 30, 2003 and 2002,
approximately $35,000 and $41,000, respectively, was recorded as current expense
associated with earnings under this grant.
NOTE 11 - LIQUIDITY
As disclosed in the Financial Statements, the Company generated $1.0
million of cash from operations during the six months ended June 30, 2003. This
improved cash flow, which was a continuation of improved results reported in the
first quarter of 2003, was used to pay back $1.2 million of liability on the
Wainwright Bank Credit Line between January 1, 2003 and June 30, 2003. As a
result of the July 1, 2002 recapitalization, and as more fully explained in Note
5 to these Financial Statements, the Reed Credit facility was cancelled and
replaced by long-term interest deferred notes that mature on September 30, 2007.
The Company has a working capital deficit of $11.2 million at June 30, 2003.
During the month of July 2003, the Company paid back an additional $0.3
million of liability on the Wainwright Bank Credit Line. As of July 31, 2003,
the Company had unused credit capacity of approximately $3.0 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 June 30, 2004, assuming no material adverse change
in the operation of the Company's business.
NOTE 12 - SUBSEQUENT EVENTS
On January 29, 2003, CareCentric received an offer to merge with Borden
Associates, Inc., pursuant to a letter dated January 28, 2003. In the proposed
transaction, Borden would merge into CareCentric and purchase the shares of
shareholders holding less than 4,000 shares for $0.55 per share. Each share of
CareCentric common stock owned of record by a holder of 4,000 shares or more of
CareCentric common stock will continue to represent one share of common stock
after the merger. The outstanding shares of Borden Associates capital stock
will, in the aggregate, be converted into the right to receive that number of
shares of CareCentric common stock equal to the quotient of the total cash
consideration paid to the holders of fewer than 4,000 shares of CareCentric
common stock divided by the $0.55 per share price. CareCentric would remain the
surviving entity. The Company filed a Form 8-K on February 4, 2003 summarizing
the terms of the offer. This transaction, if consummated, may result in the
Company becoming private so that it would no longer be a reporting company under
SEC regulations or be publicly traded on the OTC Bulletin Board. Borden
Associates is an investment company formed for the purpose of this transaction
and owned by John Reed, Stewart Reed and James Burk. John Reed and Stewart Reed
are material shareholders of CareCentric and members of its Board of Directors.
On April 23, 2003, Borden Associates sent the Special Committee of the
Board a revised proposal letter that increased the offer price to the holders of
less than 4,000 shares of CareCentric common stock from $0.55 to $0.75 per
share. The Company filed a Form 8-K on May 1, 2003 summarizing the terms of the
revised offer.
On June 5, 2003 the Company filed a Form 8-K announcing that on June 4,
2003 the Company executed a merger agreement, pending shareholder approval, with
Borden Associates. In June 2003, the Company filed a preliminary proxy statement
and Schedule 13E-3 transaction statement with the SEC. On August 1, 2003, the
SEC completed its review of the preliminary proxy statement and Schedule 13E-3
and on August 6, 2003, the Company mailed the definitive proxy to the Company's
stockholders of record as of August 4, 2003. The Company has set September 4,
2003 as the date for its shareholder meeting to vote on the pending merger.
17
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. All statements, other than statements of historical facts, included
or incorporated by reference in this 10-Q which address activities, events, or
developments which the Company expects or anticipates will or may occur in the
future, including statements regarding the Company's competitive position, the
successful development of its software products, the impact on the Company of
actual or proposed regulatory changes, the Company's expectations regarding the
adequacy of current financing arrangements, product demand and market growth,
and other statements regarding future plans and strategies, anticipated events
or trends and similar expressions concerning matters that are not historical
facts are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, and expected future
developments as well as other factors it believes are appropriate in the
circumstances. 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.
18
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 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. Revenue is
recognized for instances where tiered pricing is used according to separately
defined portions of service and software as those portions are completely
delivered to the customer.
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 under performance 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
19
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. As of June
30, 2003, no event or business situation had been identified which indicated the
carrying value of the intangibles and long-lived assets and related goodwill and
enterprise level of goodwill should be adjusted. As of December 31, 2001, a
$11.8 million impairment adjustment was recorded resulting in net intangible
assets amounting to $5.4 million as of December 31, 2001. See Note 4 of the
Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2003
Net Revenues. Revenues were $5.6 million for the three months ended June
30, 2003 and $5.8 million for the three months ended June 30, 2002, or a
decrease of 3.8%. The $0.2 million decrease was attributable to a decrease in
software system sales and related income of $1.2 million to $2.1 million in 2003
from $3.3 million in 2002 and an increase in maintenance revenues of $1.0
million to $3.5 in 2003 from $2.5 million in 2002. Management believes the main
reason for the decrease in software system sales is customer delays in making
purchases of new systems resulting from the impact of the 15% reduction in
government reimbursement rates for Medicare home health service providers and
customer resources being concentrated on implementation of changing HIPAA
regulations.
Cost of Revenues. Cost of revenues decreased $0.1 million, to $1.7 million
in 2003 from $1.8 million for the three months ended June 30, 2002. As a
percentage of total net revenues, cost of revenues increased 0.4% to 30.9% in
2003 from 30.5% in 2002. The $0.1 million decrease in cost of revenues and the
0.4% increase in percentage of total revenues resulted from lower sales and
changes in product mix respectively.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $0.3 million, or 10.2%, to $2.3 million for the three months
ended June 30, 2003 from $2.6 million for the three months ended June 30, 2002.
As a percentage of total net revenues, selling, general and administrative
expenses were 41.3% for the three months ended June 30, 2003 and 44.3% for the
three months ended June 30, 2002. This decrease was attributable to synergies
derived from cost savings initiatives completed during 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 remained
consistent at $0.9 million for the three months ended June 30, 2003 and the
three months ended June 30, 2002. As a percentage of total net revenues,
research and development expenses decreased to 15.6% for the three months ended
June 30, 2003 from 16.1% for the three months ended June 30, 2002. The small
decrease as a percentage of revenue in research and development expenditures
represents a consistent level of expenditure for research and development when
comparing the three months ended June 2003 to the three months ended June 2002.
As development of new product platforms advances, the Company expects research
and development expenses to rise above the 15.6% experienced for the three
months ended June 30, 2003.
Amortization and Depreciation. Amortization and depreciation was materially
unchanged at $0.4 million for the three months ended June 30, 2003 and June 30,
2002.
Operating Income (Loss). The Company's income from operations increased
from a profit of $0.1 million for the three months ended June 30, 2002 to a
profit of $0.3 million for the three months ended June 30, 2003. This increase
is due to reductions in all components of expenses including selling, general
and administrative, research and development and amortization expenses partially
offset by a decline in gross margin generated from revenue.
Other Income (Expense). Interest expense related to borrowings under the
Company's line of credit agreements, loans and capital lease obligations
increased $57,000 to $210,000 for the three months ended June 30, 2003 compared
to $153,000 for the three months ended June 30, 2002. Other income increased
$91,000 to $106,000 from $15,000 in the second quarter of 2002. The increase in
net interest expense in 2003 was caused by the increase in interest bearing debt
resulting from the recapitalization plan executed in July 2002.
20
Income Taxes. The Company has not incurred or paid any substantial federal
income taxes since March 2000. At December 31, 2002, CareCentric had net
operating loss ("NOL") Carryforwards for federal and state income tax purposes
of $38.5 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 June 30, 2003, and accordingly, a 100% deferred tax
valuation allowance has been recorded against these assets.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2003
Net Revenues. Revenues remained unchanged at $11.1 million for the six
months ended June 30, 2003 and the six months ended June 30, 2002. Software
system sales and related income decreased by $1.4 million to $4.2 million in
2003 from $5.6 million in 2002, while maintenance revenues increased by $1.4
million to $6.8 in 2003 from $5.4 million in 2002.
Cost of Revenues. Cost of revenues increased $0.1 million, to $3.6 million
for the six months ended June 30, 2003 from $3.5 million for the six months
ended June 30, 2002. As a percentage of total net revenues, cost of revenues
increased 0.9% to 32.1% in 2003 from 31.2% in 2002. The $0.1 million increase in
cost of revenues and the 0.9% increase in percentage of total revenues resulted
from changes in product mix.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $0.8 million, or 14.1%, to $4.5 million for the six months
ended June 30, 2003 from $5.3 million for the six months ended June 30, 2002. As
a percentage of total net revenues, selling, general and administrative expenses
were 40.9% for the six months ended June 30, 2003 and 47.6% for the six months
ended June 30, 2002. This decrease was attributable to synergies derived from
cost savings initiatives completed during 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 $0.2 million, or 9.3%, to $1.7 million for the six months ended
June 30, 2003 from $1.9 million for the six months ended June 30, 2002. As a
percentage of total net revenues, research and development expenses decreased to
15.4% for the six months ended June 30, 2003 from 17.0% for the six months ended
June 30, 2002. The decrease in research and development expenditures was
primarily due to lower expenditures in the first quarter of 2003 compared to the
first quarter of 2002 while the Company realigned its research efforts between
existing and future platform products.
Amortization and Depreciation. Amortization and depreciation was materially
unchanged at $0.8 million for the six months ended June 30, 2003 and June 30,
2002.
Operating Income (Loss). The Company's income from operations increased
from a loss of $0.4 million for the six months ended June 30, 2002 to a profit
of $0.5 million for the six months ended June 30, 2003. This change from a loss
to income from continuing operations is due to reductions in all components of
expenses including selling, general and administrative, research and development
and amortization expenses.
Other Income (Expense). Interest expense that related to borrowings under
the Company's line of credit agreements, loans and capital lease obligations
increased $61,000 to $383,000 for the six months ended June 30, 2003 compared to
$322,000 for the six months ended June 30, 2002. Other income increased $436,000
to $449,000 from $13,000 in 2002. The increase in interest expense in 2003 was
caused by the increase in interest bearing debt resulting from the
recapitalization plan executed in July 2002. The increase in other income is
principally attributable to the receipt in January 2003 of a $295,000 cash
settlement of the Columbia Home Health lawsuit combined with income generated
from customer finance charges.
BACKLOG
The Company's backlog associated with its software operations was
approximately $2.6 million at June 30, 2003 compared to $3.2 million at December
31, 2002. 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
21
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, Inc. ($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 5 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 5 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 5 to the
accompanying Consolidated Financial Statements and resulted in the creation of
the following credit and debt facilities and preferred equity securities:
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
Mestek, Inc. $ 6,000,000 Convertible Preferred March 7, 2000
Stock Series B; 9%
cumulative dividend
Mestek, Inc. $ 850,000 Preferred Stock Series March 7, 2000
C; 11% cumulative
dividend
John E. Reed $ 1,000,000 Convertible Preferred June 22, 2000
Stock Series D; 9%
cumulative dividend
22
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
----------------
$20,450,000
=================
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 Reed
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 implementing
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 initiated 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 was completed on July 1, 2002. See Notes 5 and 7 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:
CREDIT AND DEBT AND PREFERRED EQUITY SECURITIES AT JUNE 30, 2003
- ------------------------------------------------------------------------------------------------------------------
SOURCE FUNDING FORM DATE CLOSED
- ----------------------------------- ----------------- ---------------------------- ----------------------
Barrett C. O'Donnell $ 600,000 Convertible Note maturing November 11, 1999
June 30, 2007
Mestek, Inc. $ 6,000,000 Convertible Preferred Stock March 7, 2000
SeriesB; 9% cumulative
dividend
John E. Reed $ 1,000,000 Convertible Preferred Stock June 22, 2000
Series D; 9% cumulative
dividend
Mestek, Inc. $ 4,000,000 Convertible deferred interest July 1, 2002
Note maturing June 30, 2007
23
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
------------------
$21,259,373
==================
The John E. Reed and Mestek debt and equity amounts were fully funded to
the Company as of July 1, 2002. During the third and fourth quarters of 2002,
following the recapitalization of July 1, 2002, the Company paid back $1.5
million on the Wainwright Bank and Trust Company line of credit. During the
first six months of 2003, the Company paid back an additional $1.2 million on
the Wainwright Bank and Trust Company line of credit, resulting in an
outstanding balance of $3.3 million at June 30, 2003.
During the month of July 2003, the Company has paid back an additional $0.3
million on the Wainwright Bank line of credit, resulting in $3.0 million of
unused credit capacity as of July 31, 2003. 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 June 30, 2004, assuming no material adverse change
in the operation of the Company's business. See also Note 11 to Financial
Statements.
The table below summarizes the Company's debt and other contractual
obligations at June 30, 2003:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 2 - 3 YEARS 4 - 6 YEARS
--------------------------------------------------------------------
Long-Term Debt $ 8,776,000 $ - $ - $ 8,776,000
Capital Lease Obligations - - - -
Operating Leases 2,741,000 862,000 1,236,000 643,000
Line of Credit 3,325,000 3,325,000 - -
Other Obligations 1,102,000 1,102,000 - -
--------------- ---------------- --------------- ------------------
Total Contractual Cash $ 15,944,000 $ 5,289,000 $ 1,236,000 $ 9,419,000
Obligations =============== ================ =============== ==================
As of June 30, 2003, the Company had negative working capital of $11.2
million and cash equivalents of $1.0 million. The Company's current liabilities
as of June 30, 2003 include customer deposits of $1.2 million and unearned
revenues of $4.5 million.
Net cash provided by operating activities for the six months ended June 30,
2003 was a positive $1.0 million compared to a use of cash by operating
activities for the six months ended June 30, 2002 of a negative $1.9 million. As
described under "Note 12 Subsequent Events", the Company is the process of
submitting a possible "going private" merger to shareholder vote. The Company's
expenses for this transaction are projected to total approximately $550,000 and
are being funded from operating cash flow.
Cash used in financing activities during the six months ended June 30, 2003
was $0.9 million and resulted from payments of $1.2 million to reduce the
outstanding balance on the Wainwright Bank Facility offset by an increase in
interest payable resulting from $0.3 million of capitalized interest expense on
long term notes payable.
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
24
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. There has been no event or
indicator identified by the Company through July 31, 2003 which indicates there
has been any impairment in the $500,000 value of goodwill included in the
Company's Statement of Financial Condition as of June 30, 2003.
Accounting for Impairment of Long-Lived Assets. For the years ended
December 31, 2002, 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 future cash flow. 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
4 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 standard 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
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, 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.
25
On December 31, 2002, FASB issued FASB No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for companies that voluntarily change to the fair-value-based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of FASB No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company does not believe FAS 148 will have
a material effect on its financial statements.
In 2002, the FASB's Emerging Issues Task Force, ("EITF"), reached a
consensus on Issue 00-21, "Revenue Arrangements with Multiple Deliverables."
Issue 00-21 provides guidance on how a vendor should account for arrangements
under which it will perform multiple revenue-generating activities. The guidance
in this Issue is effective for revenue agreements entered into in fiscal periods
beginning after June 15, 2003. The Company is still evaluating the impact this
guidance might have on its financial position, results of operations and cash
flows. The Company will adopt the guidance in Issue 00-21 as of July 1, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of June 30, 2003, the Company's obligations include fixed rate notes
payable and a variable rate line of credit bank note with aggregate principal
balances of approximately $12.1 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 $33,250 per year.
At June 30, 2003, the Company had accounts receivable of approximately $4.0
million net of an allowance for doubtful accounts of $1.0 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.
As of June 30, 2003, 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 ensure
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.
The Company's management, including the CEO and CFO, does not expect that
its Disclosure Controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control system, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdown can occur because of simple error or mistake. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
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Based upon the Company's Disclosure Controls evaluation, the CEO and CFO
have concluded that, subject to the limitations noted above, the Company's
Disclosure Controls are effective to give reasonable assurance that the
information required to be disclosed by the Company in its periodic reports is
accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding disclosure and is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Subsequent to June 30, 2003, 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, therefore no corrective
actions needed to be taken.
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 July 31,
2003, 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.
In January 2003 the Company reached settlement with Columbia Home Health on
litigation between the Company and Columbia which was begun before the merger
with MCS Inc. Under the final terms of settlement, the Company received a cash
payment in the amount of $295,000.
Item 2. Change in Securities.
On June 4, 2003, the Company executed, pending shareholder approval, a
merger agreement with Borden Associates, John E. Reed, Stewart B. Reed and James
A. Burk, which if ultimately approved and consummated, will have the effect of
taking the Company private and thereby allow the Company to terminate
registration of its common shares under the Exchange Act. The Company has filed
a definitive proxy statement and Schedule 13E-3 and has set a meeting date of
September 4, for its stockholders to vote on the merger. The merger agreement
contemplates that all holders of less than 4,000 shares will be cashed out at a
price of $0.75 per share.
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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:
2.1(1) Agreement and Plan of Merger dated as of June 4, 2003 by and
among CareCentric, Inc., Borden Associates, Inc., John E.
Reed, Stewart B. Reed and James A. Burk.
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 as of October 25, 2002
(Incorporated by reference to Exhibit 3.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (Registration Number 000-22162).
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 (Incorporated by reference to Exhibit 3.5 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 (Registration Number 000-22162)).
3.6 Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series D Preferred Stock of the
Company (Incorporated by reference to Exhibit 3.6 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 (Registration Number 00022162)).
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(1) In accordance with Item 601(b)(2) of Regulation S-K, the
schedules have been omitted. There is a list of schedules at
28
the end of the Exhibit, briefly describing them. The Company
will furnish supplementally a copy of any omitted schedule
to the Commission upon request.
(b) Reports on Form 8-K:
On May 1, 2003, CareCentric, Inc. filed a Current Report on
Form 8-K reporting a revised offer had been received
proposing a merger transaction between the Company and
Borden Associates, Inc.
On May 9, 2003, CareCentric, Inc. filed a Current Report on
Form 8-K regarding the report of its financial results for
the three months ended March 31, 2003.
On May 23, 2003, CareCentric, Inc. filed a Current Report on
Form 8-K reporting that a revised offer had been received
proposing a merger transaction between the Company and
Borden Associates, Inc.
On June 5, 2003, CareCentric, Inc. filed a Current Report on
Form 8-K reporting the execution of the merger agreement
among the Company, Borden Associates, Inc., John E. Reed,
Stewart B. Reed and James A. Burk.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARECENTRIC, INC.
Dated: August 7, 2003 By: /s/ George M. Hare
-------------------------------------
GEORGE M. HARE
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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