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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2003
COMMISSION FILE NUMBER: 1-15587
MED DIVERSIFIED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 84-1037630
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BRICKSTONE SQUARE, FIFTH FLOOR, ANDOVER, MA 01810
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(978) 323-2500
(ISSUER'S TELEPHONE NUMBER)
MED DIVERSIFIED, INC.
100 Brickstone Square, Fifth Floor
Andover, MA 01810
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 issuer is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of October 31, 2003, 148,661,526 shares of the registrant's common
stock, $0.001 par value per share, were outstanding.
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EXPLANATORY NOTE
As more fully explained in Part II, Item 5 of this quarterly report
on Form 10-Q, on October 16, 2003, we formally requested permission from the
Securities and Exchange Commission (the "SEC") to use modified reporting
procedures under the Securities Exchange Act of 1934. We deferred the review
of our financial statements filed as part of this quarterly report by our
independent accountants, Brown & Brown, LLP ("Brown & Brown"), while our
request was pending.
Upon receiving the SEC's response to our request, Brown & Brown
began reviewing our financial statements. At the completion of Brown &
Brown's review, we plan to file a Form 8-K to report the completion of the
Brown & Brown review if that review does not result in any material
adjustments to our unaudited financial statements, or an amended quarterly
report on Form 10-Q/A if any material adjustments are required.
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INDEX
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements. 3
Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited)
and March 31, 2003 3
Condensed Consolidated Statements of Operations for the Three Months ended
September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Operations for the Six Months ended
September 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months ended
September 30, 2003 and 2002 (unaudited) 6
Notes to the Condensed Consolidated Financial Statements at September 30, 2003 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 31
Item 4. Controls and Procedures. 31
PART II. OTHER INFORMATION 31
Item 1. Legal Proceedings. 31
Item 2. Changes in Securities. 34
Item 3. Defaults Upon Senior Securities. 34
Item 4. Submission of Matters to a Vote of Security Holders. 34
Item 5. Other Information. 34
Item 6. Exhibits and Reports on Form 8-K. 34
SIGNATURES 35
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MED DIVERSIFIED, INC.
(Debtor-In-Possession as of November 27, 2002)
Condensed Consolidated Balance Sheets
(in thousands)
SEPTEMBER 30, MARCH 31,
2003 2003
(UNAUDITED)
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents ......................................................................... $ 15,827 $ 10,072
Accounts receivable, net of allowances of $21,121 and $26,209 at September 30, 2003 and
March 31, 2003, respectively ...................................................................... 34,329 36,594
Accounts receivable from affiliates, net .......................................................... 63 186
Prepayments and other current assets .............................................................. 7,890 7,847
Assets of discontinued operations ................................................................. 3,287 891
--------- ---------
Total current assets .......................................................................... 61,396 55,590
--------- ---------
Non-current assets:
Property and equipment, net ....................................................................... 11,841 13,856
Goodwill .......................................................................................... 20,840 20,548
Investments ....................................................................................... 9,612 11,231
Other intangibles, net ............................................................................ 31,646 32,042
Assets of discontinued operations, net of current portion ......................................... -- 3,105
Other assets ...................................................................................... 2,590 1,887
--------- ---------
Total non-current assets ...................................................................... 76,529 82,669
--------- ---------
TOTAL ASSETS ......................................................................................... $ 137,925 $ 138,259
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................................................................. $ 7,644 $ 5,848
Accrued salaries and benefit costs ................................................................ 17,426 14,700
Accrued liabilities ............................................................................... 8,165 8,886
Liabilities of discontinued operations ............................................................ 12,173 11,716
Current maturities of capital leases .............................................................. 1,343 10
Liabilities subject to compromise (Note 3) ........................................................ 346,557 --
--------- ---------
Total current liabilities ..................................................................... 393,308 41,160
--------- ---------
Long-Term liabilities:
Liabilities subject to compromise (Note 3) ........................................................ -- 356,873
Capital leases .................................................................................... 237 20
Other liabilities ................................................................................. 338 --
Liabilities of discontinued operations, net of current portion .................................... -- 1,852
--------- ---------
Total long-term liabilities ................................................................... 575 358,745
--------- ---------
Minority interest .................................................................................... 395 377
Stockholders' equity (deficit):
Series A convertible preferred stock, 5,000 authorized, none issued or outstanding at
September 30, 2003 and March 31, 2003 ............................................................. -- --
Common shares, $0.001 par value, 400,000 shares authorized at September 30, 2003 and March
31, 2003, 148,661 issued and outstanding at September 30, 2003 and March 31, 2003 ................. 149 149
Paid in capital ................................................................................... 427,179 427,179
Stock subscription ................................................................................ (4,400) (4,400)
Common stock options .............................................................................. 377 377
Deferred compensation ............................................................................. -- (63)
Accumulated deficit ............................................................................... (678,289) (683,896)
Accumulated other comprehensive income ............................................................ (3) (3)
Less: treasury shares at cost, 460 shares at September 30, 2003 and March 31, 2003 ................ (1,366) (1,366)
--------- ---------
Total stockholders' deficit ................................................................... (256,353) (262,023)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT .......................................................... $ 137,925 $ 138,259
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
MED DIVERSIFIED, INC.
(Debtor-In-Possession as of November 27, 2002)
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2003 and 2002
(unaudited, in thousands, except for per share information)
2003 2002
---------- --------
NET REVENUES:
Non affiliates .................................................................................... $ 85,394 $ 94,969
Affiliates ........................................................................................ 104 252
--------- ---------
Total net sales .............................................................................. 85,498 95,221
--------- ---------
COSTS AND EXPENSES:
Cost of sales ...................................................................................... 47,757 54,452
Selling, general and administrative (includes non-cash compensation of $16 thousand in 2003
and $1.7 million in 2002) ........................................................................ 32,727 43,938
Depreciation and amortization ...................................................................... 1,397 1,460
--------- ---------
Total costs and expenses ........................................................................ 81,881 99,850
--------- ---------
OPERATING INCOME (LOSS) .............................................................................. 3,617 (4,629)
OTHER INCOME (EXPENSE):
Interest expense (contractual interest for the three months ended September 30, 2003 was
$5.8 million) ...................................................................................... (1,181) (7,290)
Other income ....................................................................................... 32 823
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS, MINORITY INTEREST AND
EQUITY IN EARNINGS OF JOINT VENTURES ................................................................. 2,468 (11,096)
REORGANIZATION ITEMS ................................................................................. 1,571 --
MINORITY INTEREST, NET OF TAXES ...................................................................... -- 26
EQUITY IN EARNINGS OF JOINT VENTURES ................................................................. 1,111 887
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......................................... 5,150 (10,183)
INCOME TAX EXPENSE ................................................................................... (450) --
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............................................................. 4,700 (10,183)
(LOSS) FROM DISCONTINUED OPERATIONS .................................................................. (113) (1,281)
--------- ---------
NET INCOME (LOSS) .................................................................................... $ 4,587 $ (11,464)
========= =========
BASIC EARNINGS PER SHARE:
Continuing operations ........................................................................... $ 0.03 $ (0.07)
========= =========
Discontinued operations ......................................................................... -- (0.01)
========= =========
Net income (loss) ............................................................................... $ 0.03 $ (0.08)
========= =========
WEIGHTED AVERAGE SHARES -- BASIC ..................................................................... 148,661 147,260
DILUTED EARNINGS PER SHARE:
Continuing operations ........................................................................... $ 0.03 $ (0.07)
========= =========
Discontinued operations ......................................................................... -- (0.01)
========= =========
Net income (loss) ............................................................................... $ 0.03 $ (0.08)
========= =========
WEIGHTED AVERAGE SHARES -- DILUTED ................................................................... 149,940 147,260
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MED DIVERSIFIED, INC.
(Debtor-In-Possession as of November 27, 2002)
Condensed Consolidated Statements of Operations
For the Six Months Ended September 30, 2003 and 2002
(unaudited, in thousands, except for per share information)
2003 2002
------------ --------
NET REVENUES:
Non affiliates .................................................................................... $ 169,433 $ 192,501
Affiliates ........................................................................................ 208 530
--------- ---------
Total net sales .............................................................................. 169,641 193,031
--------- ---------
COSTS AND EXPENSES:
Cost of sales ...................................................................................... 94,483 109,416
Selling, general and administrative (includes non-cash compensation of $62 thousand in 2003
and $5.1 million in 2002) .......................................................................... 66,773 88,368
Depreciation and amortization ...................................................................... 2,836 2,924
--------- ---------
Total costs and expenses ........................................................................ 164,092 200,708
--------- ---------
OPERATING INCOME (LOSS) .............................................................................. 5,549 (7,677)
OTHER INCOME (EXPENSE):
Interest expense (contractual interest for the six months ended September 30, 2003 was
$11.9 million) ..................................................................................... (2,741) (20,130)
Other income ....................................................................................... 81 823
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS, MINORITY INTEREST AND
EQUITY IN EARNINGS OF JOINT VENTURES ................................................................. 2,889 (26,984)
REORGANIZATION ITEMS ................................................................................. (266) --
MINORITY INTEREST, NET OF TAXES ...................................................................... (18) (14)
EQUITY IN EARNINGS OF JOINT VENTURES ................................................................. 2,688 1,793
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......................................... 5,293 (25,205)
INCOME TAX EXPENSE ................................................................................... (450) --
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............................................................. 4,843 (25,205)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS ........................................................... 764 (2,459)
--------- ---------
NET INCOME (LOSS) .................................................................................... $ 5,607 $ (27,664)
========= =========
BASIC EARNINGS PER SHARE:
Continuing operations ........................................................................... $ 0.03 $ (0.17)
========= =========
Discontinued operations ......................................................................... 0.01 (0.02)
========= =========
Net income (loss) ............................................................................... $ 0.04 $ (0.19)
========= =========
WEIGHTED AVERAGE SHARES -- BASIC ..................................................................... 148,661 147,033
========= =========
DILUTED EARNINGS PER SHARE:
Continuing operations ........................................................................... $ 0.03 $ (0.17)
========= =========
Discontinued operations ......................................................................... 0.01 (0.02)
========= =========
Net income (loss) ............................................................................... $ 0.04 $ (0.19)
========= =========
WEIGHTED AVERAGE SHARES -- DILUTED ................................................................... 149,868 147,033
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
MED DIVERSIFIED, INC.
(Debtor-In-Possession as of November 27, 2002)
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 2003 and 2002
(unaudited, in thousands)
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................................. $ 5,607 $(27,664)
(Gain) loss from discontinued operations ........................................................... (764) 2,459
Minority interest .................................................................................. 18 14
Adjustments to reconcile net income (loss) from continuing operations to net cash used in
continuing operations:
Loss on disposal of fixed assets ................................................................... 290 13
Equity in joint ventures ........................................................................... (2,688) (1,793)
Non cash compensation .............................................................................. 63 5,059
Impairment charges and other non cash expenses ..................................................... -- 349
Depreciation and amortization ...................................................................... 2,836 2,924
Provision for doubtful accounts .................................................................... 2,203 1,875
Deferred financing fees ............................................................................ -- 5,896
Gain on settlement of lease obligations ............................................................ (3,300) --
Net change in assets and liabilities affecting operations, net of acquisitions:
Accounts receivable and affiliated receivables .................................................. 185 1,798
Prepayments and other assets .................................................................... (757) 944
Accounts payable and accrued liabilities ........................................................ 516 (16,357)
Other liabilities ............................................................................... 296 (772)
-------- --------
Net cash provided by (used in) operating activities ................................................ 4,505 (25,255)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................................... (704) (704)
Change in assets and liabilities of discontinued operations, net ................................... (1,172) --
Restricted cash received from sale of discontinued operations ...................................... 1,250 --
Distributions received ............................................................................. 1,230 1,898
Distributions from joint ventures subject to restriction ........................................... 3,074 --
Business acquisitions net of cash acquired ......................................................... (292) --
-------- --------
Net cash provided by investing activities .......................................................... 3,386 1,194
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on long-term debt and related party debt, net ......................................... (1,360) (1,567)
Net repayments of capital lease obligations ........................................................ (776) (1,092)
Net borrowings under factoring facility ............................................................ -- 27,312
-------- --------
Net cash provided by (used in) financing activities ................................................ (2,136) 24,653
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ................................................................ 5,755 592
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD ................................................... 10,072 8,008
-------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD ......................................................... $ 15,827 $ 8,600
======== ========
NON-CASH TRANSACTIONS:
Liabilities assumed by purchaser of discontinued operations ........................................ $ 1,421 $ --
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
MED DIVERSIFIED, INC.
(Debtor-In-Possession as of November 27, 2002)
Notes to Condensed Consolidated Financial Statements at
September 30, 2003
(unaudited)
1) NATURE OF OPERATIONS, BASIS OF PRESENTATION, GOING CONCERN AND SIGNIFICANT
ACCOUNTING POLICIES
Med Diversified, Inc. is a diversified healthcare company that provides
home healthcare and alternate site healthcare, skilled nursing, and pharmacy
management and distribution services to more than 126,000 patients in 29 states.
We provide all products and services through a national network of owned and
franchised locations.
On November 27, 2002 (the "Petition Date"), we and five of our
domestic, wholly owned subsidiaries, Chartwell Diversified Services, Inc.
("Chartwell"), Chartwell Community Services, Inc. ("CCS"), Chartwell Care
Givers, Inc. ("CCG"), Resource Pharmacy, Inc. ("Resource") and Trestle
Corporation ("Trestle") (collectively, the "Med Debtors"), filed voluntary
petitions in the United States Bankruptcy Court for the Eastern District of New
York (the "Bankruptcy Court") under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code"). The reorganization cases are being jointly
administered under the caption "In re Med Diversified, Inc., et al., Case No.
8-02 88564." The Med Debtors continue to operate their businesses as
debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and
in accordance with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court while a plan of reorganization is formulated. As a
debtor-in-possession, we are authorized to operate our business, but may not
engage in transactions outside the ordinary course of business without the
approval of the Bankruptcy Court.
On November 8, 2002, our wholly owned subsidiary, Tender Loving Care
Health Care Services, Inc. ("TLCS"), along with nineteen of TLCS' subsidiaries
(the "TLCS Debtors"; collectively, with the Med Debtors, the "Debtors"), filed
voluntary petitions in the Bankruptcy Court under the Bankruptcy Code. The TLCS
reorganization cases are being jointly administered under the caption "In re
Tender Loving Care Health Care Services, Inc., et al., Case No. 8-02-88020."
TLCS continues to operate its business as a debtor-in-possession, subject to the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court while a
plan of reorganization is formulated. As a debtor-in-possession, TLCS is
authorized to operate its business, but may not engage in transactions outside
the ordinary course of business without the approval of the Bankruptcy Court.
TLCS has not needed to obtain any debtor-in-possession financing.
The Med and TLCS Debtors' bankruptcy proceedings are each being
separately administered by the Bankruptcy Court. The TLCS Debtors' operations
represented approximately 67.8% and 67.6% of our consolidated net sales,
respectively, for the three and six months ended September 30, 2003.
By order of the Bankruptcy Court dated November 7, 2003, the Debtors
are now required to engage in a process whereby substantially all of the
assets of the Debtors may be sold pursuant to a sales process to be held on or
about January 16, 2004 in the Bankruptcy Court, or on such date as may be
agreed to amongst the Debtors and their creditors. Under the terms of this
order, the Debtors are to receive bids from various parties interested in
purchasing assets of the Debtors to purchase all or a portion of such assets
on November 25, 2003. Thereafter, in consultation with a committee of the
creditors of the Debtors (the "Oversight Committee") and a facilitator
previously appointed by the Bankruptcy Court (the "Facilitator"), one or more
bidders may be selected as a "stalking horse bidder". This means that such
bidder shall set the terms, conditions and purchase price which competing
bids received after the date of such selection must meet and/or exceed in
order to be considered as a bidder qualified to submit a counteroffer.
Consideration of the "stalking horse bidder" shall include the purchase
price, ability to fund such a purchase and other considerations relevant to
assessing the strength of such a bid.
It is possible that current and/or former members or their
affiliates of our management will submit bids for all or a portion of our
assets. If the Oversight Committee and the Debtors are unable to agree on a
"stalking horse bidder", the Facilitator may select the "stalking horse
bidder". After the "stalking horse bidder" is selected, the Bankruptcy Court
must approve the bid. The hearing at which this approval is to be obtained is
scheduled currently for December 19, 2003 (this date may change in the event
the Debtors and our creditors agree). At this hearing, the procedure under
which competing bids may be submitted to be considered at the sale hearing
will be approved by court order. Other bidders may continue to perform due
diligence and may submit competing bids for consideration at the sale hearing
to be held on or about January 16, 2004.
At this time, we cannot say with certainty that there will be a
"stalking horse bidder", what the terms of such a bid might be, whether other
bidders will submit bids to be heard at the sale hearing on January 16, 2004,
whether the closing of such a transaction will result in any meaningful recovery
for our creditors or shareholders or whether the process will be significantly
delayed due to unforeseen circumstances.
7
We have also negotiated and agreed to a term sheet whereby the
assets of our wholly owned subsidiary, Resource Pharmacy, Inc., will be sold
under a similar sale process. We anticipate that such a sale will be
consummated in January or February 2004.
BASIS OF PRESENTATION AND GOING CONCERN
The unaudited condensed consolidated financial statements included
herein have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K for our fiscal year ended March 31, 2003.
The condensed consolidated financial statements, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly our financial position and the results of
operations. These results are not necessarily indicative of the results to be
expected for the entire year.
The accompanying condensed consolidated financial statements have
been prepared on a going concern basis, which assumes continuity of
operations and realization of assets and settlement of liabilities and
commitments in the ordinary course of business. However, as a result of the
Bankruptcy proceedings and circumstances relating thereto, including our
leveraged financial structure and cumulative losses from operations, such
realization of assets and settlement of liabilities are subject to
significant uncertainty. As described above, it is likely that during the
pendency of the Bankruptcy proceedings, we shall sell or otherwise dispose of
assets and liquidate or settle liabilities for amounts other than those
reflected in the consolidated financial statements. Furthermore, a plan or
plans of reorganization could materially change the amounts reported in the
condensed consolidated financial statements, which do not give effect to any
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan or plans of reorganization. Our ability
to continue as a going concern is dependent upon, among other things, the
outcome of the sale process described above, confirmation of a plan or plans
of reorganization, future profitable operations, the ability to comply with
the terms of our financing agreements and the ability to generate sufficient
cash from operations and/or financing arrangements to meet our obligations
and capital asset expenditure requirements.
The accompanying condensed consolidated financial statements have also
been presented in conformity with the American Institute of Certified Public
Accountants (the "AICPA") Statement of Position ("SOP") 90-7, FINANCIAL
REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7").
The statement requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the Petition Date and identification of all transactions
and events that are directly associated with our reorganization. Pursuant to SOP
90-7, pre-petition liabilities are reported on the basis of the expected amounts
of such allowed claims, as opposed to the amounts for which claims may be
settled. Under a confirmed final plan of reorganization, those claims may be
settled at amounts substantially less than their allowed amounts.
Our history of recurring operating losses, liquidity issues and the
bankruptcy proceedings raise substantial doubt about our ability to continue
as a going concern. Our ability to continue as a going concern and the
appropriateness of using the going concern basis of accounting depends upon,
among other things, the ability to comply with the terms of the
debtor-in-possession financing arrangement with Sun Capital Healthcare, Inc.
("Sun Capital"), the outcome of the sale process described above, confirmation
of a plan of reorganization, success of future operations after such
confirmation and the ability to generate sufficient cash from operations and
financing sources to meet obligations.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies we followed in preparing our
financial statements are set forth in Note 2 to the financial statements
included in our Annual Report Form 10-K for the year ended March 31, 2003. We
have made no changes to these policies during this quarter.
In May 2003, with the approval of the Bankruptcy Court, we sold certain
assets and liabilities of Trestle, our wholly owned subsidiary, which made up
our Distance Medicine Business Segment. The results of the operations of Trestle
have been reported as discontinued operations in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG LIVED ASSETS ("SFAS No. 144") (see Note 8). Unless otherwise
indicated, amounts in the following notes exclude the effect of discontinued
operations.
Certain reclassifications have also been made to amounts from prior
years to conform to the 2003 presentation.
BASIC AND DILUTED LOSS PER SHARE
In accordance with SFAS No. 128, COMPUTATION OF EARNINGS PER SHARE
("SFAS No. 128"), basic earnings per share is computed by dividing the net
earnings available to common stockholders for the period by the weighted average
number of common
8
shares outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of incremental common shares
issuable upon the exercise of stock options and warrants, are excluded from the
diluted earnings per share calculation if their effect is anti-dilutive. A
summary of the shares used to compute the net income (loss) per share is as
follows (unaudited, in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
--------------- --------------
Weighted average common shares used to compute basic net income (loss) per share 148,661 147,260
Effect of dilutive securities 1,279 --
--------------- ----------------
Weighted average common shares used to compute diluted net income (loss) per share 149,940 147,260
=============== ================
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
-------------- --------------
Weighted average common shares used to compute basic net income (loss) per share 148,661 147,033
Effect of dilutive securities 1,207 --
-------------- ----------------
Weighted average common shares used to compute diluted net income (loss) per share 149,868 147,033
============== ================
As of September 30, 2003 and 2002, options and warrants to purchase
approximately 63.4 million and 64.0 million shares of common stock were
outstanding, respectively. The common stock equivalents that were anti-dilutive
were excluded from the computation of diluted loss per share for the three
months ended September 30, 2002 as such options and warrants were anti-dilutive.
In accordance with SFAS No. 128, we have included certain options and warrants
to acquire shares in fully diluted earnings per share because they are issuable
for little or no cash consideration.
STOCK-BASED COMPENSATION
As allowed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("SFAS No. 123"), we have elected to account for stock-based compensation at
intrinsic value with disclosure of the effects of fair value accounting on net
loss and net loss per share on a pro forma basis. At September 30, 2003, the
Company had two stock incentive plans. We account for awards issued to employees
under the plan using the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. No compensation expense has been recognized in
connection with its stock option plans, as all options granted under the plan
had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income (loss) and net income (loss) per share had we adopted
the fair value recognition provisions of SFAS No. 123 (unaudited, in thousands,
except per share information):
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- ----------
Net income (loss), as reported $ 4,587 $ (11,464)
Deduct: total stock-based employee compensation expense
determined under fair market value based method for all
awards, net of related tax effects (8) (7)
-------- ----------
Pro forma net income (loss) $ 4,579 $ (11,471)
======== ==========
Earnings (loss) per share:
Basic, as reported $ 0.03 $ (0.08)
======== ==========
Basic, pro forma $ 0.03 $ (0.08)
======== ==========
Diluted, as reported $ 0.03 $ (0.08)
======== ==========
Diluted, pro forma $ 0.03 $ (0.08)
======== ==========
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- -----------
Net income (loss), as reported $ 5,607 $ (27,664)
Deduct: total stock-based employee compensation expense
determined under fair market value based method for all
awards, net of related tax effects (13) (14)
-------- ----------
Pro forma net income (loss) $ 5,594 $ (27,678)
======== ==========
Earnings (loss) per share:
Basic, as reported $ 0.04 $ (0.19)
======== ==========
Basic, pro forma $ 0.04 $ (0.19)
======== ==========
Diluted, as reported $ 0.04 $ (0.19)
======== ==========
Diluted, pro forma $ 0.04 $ (0.19)
======== ==========
9
We estimated the fair value on the date of grant using the
Black-Scholes Option Pricing Model. The following assumptions were used for each
reporting period.
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------------- -----------
Risk free interest rate 4.37% 4.39%
Expected option lives (in years) 7.72 7.71
Expected volatility 184% 166%
Expected dividend yield --% --%
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
------------------ -------------
Risk free interest rate 4.04% 4.22%
Expected option lives (in years) 7.72 7.71
Expected volatility 193% 170%
Expected dividend yield --% --%
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("SFAS No. 149"), which amends SFAS No. 133 for certain decisions
made by the FASB Derivatives Implementation Group. In particular, SFAS No. 149
(1) clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an "underlying"
(which is a market value guarantee) to conform it to language used in FASB
Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR
GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS and (4)
amends certain other existing pronouncements. This Statement is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, most provisions of
SFAS 149 are to be applied prospectively. This Statement does not have a
material impact upon our financial position, results of operations or cash flows
in the period ended September 30, 2003.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS
No. 150"). This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003. This statement does not result in any material
change to our existing reporting.
2) PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
EVENTS LEADING TO BANKRUPTCY
As has been previously disclosed in our public filings, we had, up
until October 2002, been long dependent on National Century Financial
Enterprises, Inc. ("NCFE") to provide us financing for current operations under
various Sales and Subservicing Agreements. In or around October 2002, NCFE began
to suffer financial difficulties after an ongoing audit revealed financial
inaccuracies in NCFE's accounting. During the week of October 14, 2002, we
submitted receivables for sale to NCFE under the terms of the Sales and
Subservicing Agreements, but did not receive funding from NCFE for those sales.
NCFE never resumed funding after that point, resulting in a breach of their
obligations under the various Sales and Subservicing Agreements. Nevertheless,
through the end of October, NCFE continued to assure us that funding would
resume and we acted in reliance on those assurances. The resulting cash
shortages caused us to fail to meet certain vendor obligations when they became
due and caused us eventually to default on certain obligations to Private
Investment Bank, Ltd. ("PIBL").
10
NCFE continued to fail to meet its funding obligations, having a
materially adverse effect on our operations. This forced our subsidiary, TLCS,
to file for bankruptcy protection on November 8, 2002 in the Bankruptcy Court.
During this period, NCFE interpreted the terms of the Sales and Subservicing
Agreements to mean that it had a security interest in any accounts receivable of
ours, even if we had not submitted such accounts to NCFE for sale. We disagree
with this interpretation. We believe that, at most, NCFE had a security interest
in future accounts receivable only to the extent that we might have owed NCFE
servicing fees. NCFE's continued intransigence regarding this interpretation
inhibited our ability to arrange for alternate sources of financing, because few
lenders would be willing to finance us if they were unable to take an undisputed
first priority security interest in our accounts receivable. NCFE and certain of
its affiliates filed for bankruptcy protection on November 18, 2002 in the
United States Bankruptcy Court for the Southern District of Ohio, Eastern
Division. In NCFE's Chapter 11 proceeding and in other venues prior to the
filing of the NCFE bankruptcy, NCFE's counsel sought temporary restraining
orders restricting our ability to access cash held by NCFE and cash that we
collected on our own account. Because of immediate cash needs and in order to
obtain the ability to access necessary cash and move forward with a new
financing partner, the Med Debtors filed for bankruptcy on November 27, 2002.
REORGANIZATION
As noted previously, the Debtors are operating their businesses as
debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and
in accordance with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court while a plan of reorganization is formulated. As such,
the Debtors are authorized to operate their business, but may not engage in
transactions outside the ordinary course of business without the approval of the
Bankruptcy Court.
Soon after the Chapter 11 filings, the Debtors notified all known or
potential creditors, in an effort to identify and quantify all pre petition
claims against them (please note that the bar date for the filing of proofs of
claim of our creditors for each of the Med Debtors and TLCS Debtors has passed).
As a result of the Debtors' filings, substantially all of their indebtedness and
lease obligations went into technical default. The Chapter 11 filings, however,
automatically stayed or enjoined the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to the Petition
Date, subject to certain exceptions under the Bankruptcy Code. For example,
those creditor actions that seek to obtain property, or those that seek to
create, perfect or enforce any lien against property of the Debtors, or those
that seek to exercise rights or remedies with respect to a pre-petition claim,
are enjoined. Such claims may proceed only if the Bankruptcy Court grants relief
from the automatic stay. Under the Bankruptcy Code, actions to collect pre
petition indebtedness, as well as most other pending litigation, are stayed and
other contractual obligations against the Debtors generally may not be enforced,
absent an order of the Bankruptcy Court.
At hearings held on December 2, 2002, December 9, 2002 and December 20,
2002 the Bankruptcy Court granted the Med Debtors' various motions to stabilize
their operations and business relationships with customers, vendors, employees
and others. The Court granted the Med Debtors authority to, among other things:
(a) pay certain pre-petition and post-petition employee wages, salaries,
benefits, and other employee obligations; and (b) pay vendors and other
providers in the ordinary course of business for goods and services received
from and after the Petition Date, and other similar agreements. The Bankruptcy
Court also gave interim and final approval for use of cash collateral.
On November 12, 2002, the Bankruptcy Court granted TLCS the authority
to: (a) maintain and continue to use its existing bank accounts without
interruption and in the ordinary course of business; (b) continue to use
existing business forms, including checks and other documents; and (c) collect
and utilize cash collateral on an interim basis pending further hearings before
the Bankruptcy Court. Since November 12, 2002, TLCS has maintained the authority
to use cash collateral and continued to operate its business in the ordinary
course. TLCS has taken affirmative steps to stabilize its business and preserve
assets for the benefit of its creditors. Within its rights under the applicable
provisions of the Bankruptcy Code, TLCS has eliminated certain unnecessary or
burdensome obligations under various leases and contracts.
DEBTOR-IN-POSSESSION FINANCING
With regard to the Med Debtors, the Bankruptcy Court, by order dated
December 23, 2002, approved a Debtor-In-Possession Master Purchase and Sale
Agreement ("DIP Facility") between certain of our subsidiaries in bankruptcy,
including Chartwell, CCG, CCS and Resource and Sun Capital. This secured
debtor-in-possession financing arrangement was approved for the payment of
certain permitted pre-petition claims, working capital needs and other general
corporate purposes. It also provided a source of outside financing in order for
us to make up potential gaps in our cash flow during the course of our
bankruptcy.
Under the DIP Facility, certain of our subsidiaries can sell accounts
receivable to Sun Capital. After such sale, Sun Capital factors the receivables
and submits an advance to the subsidiary selling the receivable. The advance is
net of offsets based on a history of collections for the receivable or
receivables submitted and a contractually permitted reserve amount. The
receivables (in addition to
11
other receivables not sold to Sun Capital but forwarded to Sun Capital in order
to provide adequate collateral) then are sent to lockbox accounts controlled by
Sun Capital. Sun Capital collects the receivables and provides a reconciliation
of them to show which receivables have been collected and which have not. We pay
at a daily percentage rate of .075% for each day a factored receivable remains
uncollected, which is equivalent to an annual percentage rate of 27%. Any
non-factored receivables are maintained in a reserve account at Sun Capital and
are available as cash disbursements.
During the three and six months ended September 30, 2003, CCG sold
approximately $5.2 million and $11.4 million, respectively, worth of receivables
to Sun Capital and received advances in the amount of $4.2 million and $9.1
million, respectively. Receivables sold in excess of advances are reported net
of fees in prepayments and other assets in our Condensed Consolidated Balance
Sheet in this Form 10-Q for the quarter ended September 30, 2003.
DEVELOPMENT OF A PLAN OF REORGANIZATION
In connection with the sale process described previously in Note 1 of
this quarterly report, the Debtors continue to develop a plan of
reorganization through negotiations with their respective key creditor
constituencies. A substantial portion of all pre-petition liabilities are
subject to settlement under such a plan of reorganization to be voted upon by
the Debtors' creditors, and subject to confirmation by the Bankruptcy Court.
No assurance can be given regarding the timing of such a plan, the likelihood
that such a plan will be developed, or the terms on which such a plan may be
conditioned.
Although the Debtors hope to file a reorganization plan that provides
emergence from Chapter 11 during 2004, there can be no assurances that a plan of
reorganization will be proposed by the Debtors, or approved by the requisite
creditors, or confirmed by the Bankruptcy Court, or that any such plan will be
consummated.
As previously described in Note 1 of this quarterly report, by order
of the Bankruptcy Court dated November 7, 2003, the Debtors are now required
to engage in a process whereby substantially all of the assets of the Debtors
may be sold pursuant to a sale process to be held on or about January 16,
2004 in the Bankruptcy Court, or on such date as may be agreed to amongst the
Debtors and their creditors. Under the terms of this order, the Debtors are
to receive bids from various parties interested in purchasing assets of the
Debtors to purchase all or a portion of such assets on November 25, 2003.
Thereafter, in consultation with the Oversight Committee of the creditors of
the Debtors and the Facilitator previously appointed by the Bankruptcy Court,
one or more bidders may be selected as a "stalking horse bidder". This means
that such bidder shall set the terms, conditions and purchase price which
competing bids received after the date of such selection must meet and/or
exceed in order to be considered a bidder qualified to submit a counteroffer.
Consideration of the "stalking horse bidder" shall include the purchase
price, ability to fund such a purchase and other considerations relevant to
assessing the strength of such a bid.
If the Oversight Committee and the Debtors are unable to agree on a
"stalking horse bidder", the Facilitator may select the "stalking horse
bidder". After the "stalking horse bidder" is selected, the Bankruptcy Court
must approve the bid. The hearing at which this approval is to be obtained is
scheduled currently for December 19, 2003 (this date may change in the event
the Debtors and our creditors agree). At this hearing, the procedure under
which competing bids may be submitted to be considered at the sale hearing
will be approved by court order. Other bidders may continue to perform due
diligence and may submit competing bids for consideration at the sale hearing
to be held on or about January 16, 2004.
At this time, we cannot say with certainty that there will be a
"stalking horse bidder", what the terms of such a bid might be, whether other
bidders will submit bids to be heard at the sale hearing on January 16, 2004,
whether the closing of such a transaction will result in any meaningful recovery
for our creditors or shareholders or whether the process will be significantly
delayed due to unforeseen circumstances.
We have also negotiated and agreed to a term sheet whereby the
assets of our wholly owned subsidiary, Resource Pharmacy, Inc., will be sold
under a similar sale process. We anticipate that such a sale will be
consummated in January or February 2004.
The Med Debtors had the exclusive right to file a plan of
reorganization during the 120 days after the Petition Date until March 27, 2003.
We sought and received by orders of the Bankruptcy Court, extensions to this
exclusivity period. We now have until December 19, 2003 to file the plan. Our
creditors have until February 20, 2004 to approve such plan. TLCS filed for
extensions of the exclusivity period and the Bankruptcy Court approved such
extension until December 19, 2003. The terms of the sale process set forth
above may effect whether any further extensions will be sought by the Debtors or
whether the Debtors will file a plan of reorganization at all.
A plan of reorganization is deemed accepted by holders of claims
against and equity interests in the Debtors if (i) at least one-half in number
and two-thirds in dollar amount of claims actually voting in each impaired class
of claims have voted to accept the plan; and (ii) at least two-thirds in amount
of equity interests actually voting in each impaired class of equity interests
have voted to accept the plan.
12
The Bankruptcy Court may confirm a plan of reorganization
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders if certain requirements of the Bankruptcy Code are met. For
example, if a class of claims or equity interests does not receive or retain any
property under the plan, such claims or interests are deemed to have voted to
reject the plan. The precise requirements and evidentiary showing for confirming
a plan notwithstanding its rejection by one or more impaired classes of claims
or equity interests, depends upon a number of factors. Such factors include the
status and seniority of the claims or equity interest in the rejecting class
(i.e., secured claims or unsecured claims, subordinated or senior claims,
preferred or common stock). Generally, with respect to common stock interests, a
plan may be "crammed down" if the proponent of the plan demonstrates that (i)
the common stock holders are receiving the value of their common stock interests
or no class junior to the common stock is receiving or retaining property under
the plan and (ii) no class of claims or interests senior to the common stock is
being paid more than in full.
As required by the Bankruptcy Code, the United States Trustee has
appointed official committees of unsecured creditors for TLCS, the Company
and CCG (the "Official Committees"). The Official Committees, through their
legal representatives, have a right to be heard on all matters that come
before the Bankruptcy Court. There can be no assurances that the Official
Committees will support the Debtors' positions in the reorganization cases or
the plan or plans of reorganization if proposed. Disagreements among the
Debtors and the Official Committees could protract the reorganization cases,
negatively impacting the Debtors' ability to operate during their Chapter 11
cases, thus, possibly delaying the Debtors' emergence from Chapter 11.
On December 22, 2002, the TLCS Debtors filed, and on January 13, 2003,
the Med Debtors filed with the Bankruptcy Court schedules and statements of
financial affairs setting forth, among other things, the assets and liabilities
of the Debtors, subject to the assumptions contained in certain notes filed in
connection therewith. Subsequent to the filing of the schedules and statements
of financial affairs, the Med Debtors filed several amendments, setting forth
potential creditors who were inadvertently omitted. All of the schedules are
subject to further amendment or modification, if necessary. The initial deadline
for filing proofs of claim against the Med Debtors with the Bankruptcy Court was
April 21, 2003, with limited exceptions for governmental entities. The deadline
for the additional creditors to file claims against the Med Debtors, pursuant to
the amended schedules, was September 2, 2003. The deadline for filing proofs of
claim against the TLCS Debtors with the Bankruptcy Court was May 30, 2003, with
limited exceptions for governmental entities. Differences between amounts
scheduled by the Debtors and claims by creditors will be investigated and
resolved in connection with the claims resolution process. That process has
commenced, and in light of the number of the Debtors' creditors, may take
considerable time to complete. Accordingly, the ultimate number and amount of
allowed claims is not presently known and, because the settlement terms of such
allowed claims are subject to a confirmed plan of reorganization, the ultimate
distribution with respect to allowed claims cannot be presently ascertained.
EFFECTS OF CHAPTER 11 ON OUR BUSINESS
The potential adverse publicity associated with the Chapter 11 filings
and the resulting uncertainty regarding our future may hinder our ongoing
business activities and our ability to operate, fund and execute our business
plan. Such potential negative publicity may impair relations with existing and
potential customers, negatively impact our ability to attract and retain key
employees, limit our ability to obtain trade credit and impair present and
future relationships with vendors and service providers.
As a result of the Chapter 11 filings, the realization of assets and
the liquidation of liabilities are subject to uncertainty. While operating as
debtors-in-possession under the protection of the Bankruptcy Code, and while
subject to Bankruptcy Court approval or otherwise as permitted in the normal
course of business, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
condensed consolidated financial statements. Further, a plan of reorganization
could materially change the amounts and classifications reported in the
consolidated historical financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of liabilities that might
be necessary as a consequence of confirmation of a plan of reorganization.
Under the system of priorities of claim established by the Bankruptcy
Code, unless creditors agree otherwise, pre- and post-petition liabilities must
be satisfied in full before shareholders are entitled to receive any
distribution or retain any property under a plan. The ultimate recovery to
creditors and/or common shareholders, if any, will not be determined until
confirmation of a plan or plans of reorganization. No assurance can be given as
to what values, if any, will be ascribed in the Chapter 11 cases to each of
these constituencies, or what types or amounts of distributions, if any, they
will receive. A plan of reorganization could result in holders of our common
stock receiving no distribution on account of their interests and cancellation
of their existing stock. The value of the common stock is highly speculative. We
urge that appropriate caution be exercised with respect to existing and future
investments in our securities and the securities of the other Debtors.
13
REORGANIZATION ITEMS
Reorganization items represent the net amounts we incurred as a
direct result of the Chapter 11 filing and are presented separately in the
Condensed Consolidated Statements of Operations. These items include, but are
not limited to, professional fees, Office of the United States Trustee fees
and other expenditures relating to the Bankruptcy cases, offset by gains
realized from the settlement of pre-petition liabilities and obligations. We
incurred and will continue to incur significant costs associated with the
reorganization. The amount of these costs, which are being expensed as
incurred, may significantly and adversely affect our results of operations.
Reorganization items included in our Condensed Consolidated
Statement of Operations for the three and six months ended September 30, 2003
consist of the following (unaudited, in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
Professional services $ 1,613 $ 3,251
Other reorganization costs 77 221
United States Trustee filing fees 39 94
Gain on settlement of lease obligations (3,300) (3,300)
------- -------
$(1,571) $ 266
======= =======
During the quarter ended September 30, 2003, our TLCS subsidiary
settled an outstanding capital lease obligation and renegotiated the terms of an
operating lease agreement, resulting in a reorganization gain of $1.9 million
and $1.4 million, respectively.
3) LIABILITIES SUBJECT TO COMPROMISE
"Liabilities subject to compromise" refers to liabilities incurred
prior to the commencement of the Chapter 11 filings. These liabilities,
consisting primarily of related-party and long-term debt, certain accounts
payable and accrued liabilities, represent management's estimate of known or
potential pre-petition claims to be resolved in connection with the Chapter 11
filings.
Under the Bankruptcy Code, the Debtors may assume, assume and assign,
or reject executory contracts and unexpired leases, including leases of real and
personal property, subject to the approval of the Bankruptcy Court and certain
other conditions. Rejection constitutes a court-authorized breach of the lease
or contract in question and, subject to certain exceptions, relieves the Debtors
of their future obligations under such lease or contract, but creates a deemed
pre-petition claim for damages caused by such breach or rejection. Parties whose
contracts or leases are rejected may file claims against the rejecting Debtor
for damages. Generally, the assumption, or assumption and assignment, of an
executory contract or unexpired lease requires the Debtors to cure all prior
defaults under such executory contract or unexpired lease, including all
pre-petition arrearages, and to provide adequate assurance of future
performance. In this regard, we expect that liabilities subject to compromise
and resolution in the Chapter 11 case will arise in the future as a result of
claims for damages created by the Debtors' rejection of various executory
contracts and unexpired leases. Conversely, we would expect that the assumption,
or assumption and assignment, of certain executory contracts and unexpired
leases might convert liabilities shown as subject to compromise, into
liabilities not subject to compromise.
Under bankruptcy law, actions by creditors to collect indebtedness
we owed prior to the Petition Date are stayed and certain other pre-petition
contractual obligations may not be enforced against the Debtors. We have
received approval from the Bankruptcy Court to pay certain pre-petition
liabilities including employee salaries and wages, benefits and other
employee obligations. Adjustments to the claims may result from negotiations,
payments authorized by Bankruptcy Court order, additional rejection of
executory contracts including leases or other events.
Pursuant to an order of the Bankruptcy Court, we mailed notices to
all known creditors that the deadline for filing proofs of claim with the
Bankruptcy Court was April 21, 2003 for the Med Debtors and May 30, 2003 for
the TLCS Debtors. For the Med Debtors, an estimated 647 claims were filed as
of June 20, 2003 out of an estimated 10,276 notices sent to constituents. For
the TLCS Debtors, an estimated 1,102 claims were filed as of May 30, 2003 out
of an estimated 22,088 notices sent to constituents. Amounts that we recorded
are in many instances different from amounts filed by our creditors.
Differences between amounts scheduled by us and claims by creditors are being
investigated and resolved in connection with our claims resolution process.
Until the process is complete, the ultimate number and amount of allowable
claims cannot be ascertained. In this regard, it should be noted that the
claims reconciliation process may result in material adjustments to current
estimates of allowable claims. The ultimate resolution of these claims will
be based upon the final plan of reorganization.
14
The following table summarizes the components of liabilities subject to
compromise in the Company's Condensed Consolidated Balance Sheets as of
September 30, 2003 and March 31, 2003 (in thousands):
SEPTEMBER 30, 2003 MARCH 31, 2003
(UNAUDITED)
------------------ ---------
Long Term Debt
Borrowings under credit facility ...................................... $121,629 $122,989
Notes payable related to acquisitions ................................. 2,892 2,892
Term notes ............................................................ 28,679 28,679
Debentures ............................................................ 57,300 57,300
Debentures held by related party ...................................... 12,500 12,500
Other notes payable ................................................... 16,893 16,893
-------- --------
Total debt ........................................................ 239,893 241,253
Due to government agencies ............................................ 50,188 50,230
Related party liability ............................................... 2,337 2,337
Lease obligations ..................................................... 4,560 10,189
Accounts payable and vendor obligations ............................... 16,250 16,671
Accrued salaries and related benefit costs ............................ 14,234 16,308
Accrued interest ...................................................... 6,241 4,609
Other accrued expenses ................................................ 12,854 15,276
-------- --------
Total liabilities ................................................. 106,664 115,620
-------- --------
Total debt and liabilities subject to compromise .............. $346,557 $356,873
======== ========
As of September 30, 2003, $346.6 million of liabilities subject to
compromise have been classified as current liabilities as the Debtors expect to
file a plan of reorganization that provides for emergence from Chapter 11 during
2004. However, there can be no assurance that a plan of reorganization will be
approved by the requisite creditors or confirmed by the Bankruptcy Court.
Approximately $296.2 million at March 31, 2003 would have been
classified as current liabilities if the Chapter 11 petitions had not been
filed. Filing a petition generally causes the payment of unsecured or
undersecured liabilities to be prohibited before the plan is confirmed. The
Chapter 11 reorganization ending in confirmation of a plan typically takes more
than one year or one operating cycle, if longer. Therefore, we classified all
debt and liabilities subject to compromise as long term.
In accordance with SOP 90-7, we discontinued accruing interest relating
to certain debt currently classified as liabilities subject to compromise
effective November 8, 2002 for the TLCS Debtors and November 27, 2002 for the
Med Debtors. Thus, contractual interest for the three and six months ended
September 30, 2003 was $5.8 million and $11.9 million, respectively, which is
$4.6 million and $9.2 million, respectively, in excess of interest included in
the accompanying financial statements.
DIVESTITURE
The Bankruptcy Code provides a mechanism by which the Debtors may
abandon property if it is no longer beneficial to the estates and its retention
serves no purpose in effectuating the goals of the Bankruptcy Code. Abandonment
constitutes a court-authorized divestiture of all of the Debtors' interests in
the property. Abandonment gives rise to potential claims against the Debtors.
Due to the uncertain nature of many of the potential rejection and
abandonment related claims, management is unable to project the magnitude of
such claims with any degree of certainty at this time.
4) BUSINESS COMBINATIONS
In September 2003, TLCS acquired certain assets of the home health
care operations from The Washington Hospital located in Washington,
Pennsylvania. The total acquisition cost was approximately $700 thousand, of
which approximately $280 thousand plus related legal costs were paid by TLCS.
The acquired business will be operated by a TLCS franchisee, pursuant to the
terms of TLCS' standard franchise agreement. In connection with this
acquisition, we recorded goodwill of $292 thousand.
5) JOINT VENTURES AND MINORITY INTEREST
As a result of the Chartwell merger in August 2001, we have investments
in eight (8) joint ventures with various healthcare providers that provide home
care services, including high-tech infusion therapy, nursing, clinical
respiratory services and durable medical equipment to home care patients. We
also provide various management services for each of the joint ventures under
Administrative Service Agreements, which range for periods from one to five
years. Our ownership in the joint ventures includes: one with 80% interest,
which is consolidated, one with 45% interest and six with 50% interest, which we
account for on an equity basis. Minority interest of $395 thousand and $377
thousand, respectively at September 30, 2003 and March 31, 2003, represents the
outside ownership in our consolidated joint venture.
15
A condensed balance sheet at September 30, 2003 and March 31, 2003 and
a condensed statement of operations of the joint ventures accounted for on the
equity method for the three and six months ended September 30, 2003 and 2002 are
as follows:
Condensed Combined Balance Sheet
(unaudited, in thousands)
SEPTEMBER 30, 2003 MARCH 31, 2003
------------------ -------------
Current assets ............................................................... $21,703 $26,670
Non current assets ........................................................... 6,134 5,871
------- -------
27,837 32,541
======= =======
Current liabilities .......................................................... 6,563 8,564
Non current liabilities ...................................................... 431 529
------- -------
6,994 9,093
Members equity:
Company ...................................................................... 10,205 11,824
Other members ................................................................ 10,638 11,624
------- -------
$27,837 $32,541
======= =======
Condensed Combined State of Operations
(unaudited, in thousands)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Revenues ..................................................................... $16,941 $18,803
Expenses ..................................................................... 14,525 16,857
------- -------
2,416 1,946
Net income allocated to other members ........................................ 1,305 1,059
------- -------
Net income ................................................................... $ 1,111 $ 887
======= =======
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Revenues ..................................................................... $37,146 $37,035
Expenses ..................................................................... 31,382 33,062
------- -------
5,764 3,973
------- -------
Net income allocated to other members ........................................ 3,076 2,180
------- -------
Net income ................................................................... $ 2,688 $ 1,793
======= =======
6) INTANGIBLE ASSETS
Our intangible assets at September 30, 2003 and March 31, 2003, other
than goodwill, are as follows (in thousands):
GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION
SEPTEMBER 30, 2003 MARCH 31, 2003 SEPTEMBER 30, 2003 MARCH 31, 2003
(UNAUDITED) (UNAUDITED)
----------- -------------- ----------- --------------
Amortized intangible assets:
Administrative service agreements $ 7,950 $ 7,950 $ (4,404) $ (4,008)
-------- -------- --------- ---------
Total amortized intangible assets 7,950 7,950 (4,404) (4,008)
-------- -------- --------- -------
Unamortized identifiable intangible assets 28,100 28,100 -- --
-------- -------- --------- ---------
Total identifiable intangible assets $ 36,050 $ 36,050 $ (4,404) $ (4,008)
======== ======== ========= =========
Unamortized intangible assets consist of contracts that we maintain
with regional, national and governmental healthcare providers.
16
Amortization expense related to intangible assets for the three and six
months ended September 30, 2003 amounted to $198 thousand and $396 thousand,
respectively. The annual amortization that is expected to be recorded is as
follows (unaudited, in thousands):
YEAR ENDING MARCH 31,
2004 $ 792
2005 792
2006 792
2007 792
2008 774
Thereafter --
-------
$ 3,942
=======
7) FINANCING ARRANGEMENTS
Our indebtedness at September 30, 2003 and March 31, 2003 consisted of
the following (in thousands):
SEPTEMBER 30, 2003 MARCH 31, 2003
(UNAUDITED)
----------------- --------------
Borrowings under credit facility........................................... $ 121,629 $ 122,989
Notes payable related to acquisitions...................................... 2,892 2,892
Term notes................................................................. 28,679 28,679
Debenture held by related party............................................ 12,500 12,500
Debentures................................................................. 57,300 57,300
Other notes payable........................................................ 16,893 16,893
--------- -------
Total...................................................................... 239,893 241,253
Less: debt subject to compromise........................................... (239,893) (241,253)
--------- ---------
Debt and related party debt $ -- $ --
========= =========
Due to the failure to make scheduled payments and the commencement of
the Chapter 11 proceedings, we are in default of substantially all of our
pre-petition debt and other long-term obligations. Under Chapter 11 of the
Bankruptcy Code, actions against the Debtors to collect pre-petition
indebtedness are subject to an automatic stay provision. These debt obligations
at September 30, 2003 and March 31, 2003 are classified as liabilities subject
to compromise in the accompanying Condensed Consolidated Balance Sheets in
accordance with SOP 90-7.
In accordance with SOP 90-7, we discontinued accruing interest relating
to certain debt currently classified as liabilities subject to compromise
effective November 8, 2002 for the TLCS Debtors and November 27, 2002 for the
Med Debtors. Thus, contractual interest for the three and six months ended
September 30, 2003 was $5.8 million and $11.9 million, respectively, which is
$4.6 million and $9.2 million, respectively, in excess of interest included in
the accompanying financial statements.
8) DISCONTINUED OPERATIONS
In June 2001, e-Net Technology, Ltd. ("e-Net") filed for receivership.
In accordance with the Emerging Issues Task Force ("EITF") Abstract No. 95-18,
ACCOUNTING AND REPORTING FOR A DISCONTINUED BUSINESS SEGMENT WHEN THE
MEASUREMENT DATE OCCURS AFTER THE BALANCE SHEET DATE BUT BEFORE THE ISSUANCE OF
FINANCIAL STATEMENTS ("EITF 95-18"), we reflected the discontinued operations in
the fiscal year ended March 31, 2001.
In May 2003, with the approval of the Bankruptcy Court, we sold certain
assets and liabilities of Trestle, our wholly owned subsidiary, which made up
our Distance Medicine Solutions Business Segment, to Trestle Acquisition
Corporation, a wholly owned subsidiary of Sunland Entertainment Co., Inc. The
transaction included the sale of all of Trestle's intellectual property rights,
certain operating assets plus the assumption of certain liabilities totaling
approximately $1.4 million. Cash proceeds from the sale of $1.25 million will
remain in escrow pending completion of our plan of reorganization. A portion of
the proceeds is currently being used to pay professional fees associated with
the Trestle sale and fees associated with our continuing bankruptcy proceedings.
As of September 30, 2003, net remaining proceeds of $1.1 million is included in
assets of discontinued operations on the Condensed Consolidated Balance Sheet.
In accordance with SFAS No. 144, the results of operations have been reported as
discontinued operations.
The net sales, expenses, assets and liabilities of our wholly owned
subsidiaries, Trestle and e-Net, have been combined in our condensed
consolidated financial statements under discontinued operations. The following
is a condensed statement of operations for Trestle and e-Net for the three and
six months ended September 30, 2003 and 2002, which comprises the results from
discontinued operations (unaudited, in thousands):
THREE MONTHS ENDED
SEPTEMBER 30, 2003
TRESTLE E-NET TOTAL
------- ------- ------
Net sales ........................................................ $ -- $ -- $ --
Total cost and expenses .......................................... -- -- --
----- ------ -----
-----
Operating loss from discontinued operations ...................... -- -- --
Interest and taxes ............................................... -- -- --
Reorganization items ............................................. (37) -- (37)
Other ............................................................ 5 -- 5
Loss on sale ..................................................... (81) -- (81)
----- ------ -----
Income from discontinued operations .............................. $(113) $ -- $(113)
===== ====== =====
17
SIX MONTHS ENDED SEPTEMBER 30, 2003
TRESTLE E-NET TOTAL
------- ------- ------
Net sales ........................................................... $112 $ -- $112
Total cost and expenses ............................................. 608 -- 608
------- -------- -------
Operating loss from discontinued operations ......................... (496) -- (496)
Interest and taxes .................................................. (34) -- (34)
Reorganization items ................................................ (34) -- (34)
Other ............................................................... (1) -- (1)
Gain on sale ........................................................ 1,329 -- 1,329
------- -------- -------
Income from discontinued operations ................................. $764 $ -- $764
======= ======== =======
THREE MONTHS ENDED SEPTEMBER 30, 2002
TRESTLE E-NET TOTAL
------- ------- ------
Net sales ........................................................... $389 $ -- $389
Total cost and expenses ............................................. 1,670 -- 1,670
------- -------- -------
Operating loss from discontinued operations ......................... (1,281) -- (1,281)
------- -------- -------
Loss from discontinued operations ................................... $(1,281) $ -- $(1,281)
======= ======== =======
SIX MONTHS ENDED SEPTEMBER 30, 2002
TRESTLE E-NET TOTAL
------- ------- ------
Net sales ........................................................... $972 $ -- $972
Total cost and expenses ............................................. 3,431 -- 3,431
------- -------- -------
Operating loss from discontinued operations ......................... (2,459) -- (2,459)
------- -------- -------
Loss from discontinued operations ................................... $(2,459) $ -- $(2,459)
======= ======== =======
The following is a condensed balance sheet for Trestle and e-Net at
September 30, 2003 and March 31, 2003 (in thousands):
SEPTEMBER 30, 2003
(UNAUDITED)
TRESTLE E-NET TOTAL
------- ------- ------
ASSETS
Current assets:
Cash ................................................................... $ -- $ 2,172 $ 2,172
Restricted cash ........................................................ 1,101 -- 1,101
Other receivables ...................................................... -- 14 14
------ -------- --------
Total current assets ................................................... 1,101 2,186 3,287
------ -------- --------
Total assets .............................................................. $1,101 $ 2,186 $ 3,287
====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other liabilities ................................. $ 80 $ 11,222 $ 11,302
Liabilities subject to compromise ...................................... 871 -- 871
------ -------- --------
Total current liabilities .............................................. 951 11,222 12,173
------ -------- --------
Stockholders' equity (deficit) ............................................ 150 (9,036) (8,886)
------ -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ...................... $1,101 $ 2,186 $ 3,287
====== ======== ========
18
MARCH 31, 2003
TRESTLE E-NET TOTAL
------- ------- ------
ASSETS
Current assets:
Cash ................................................................. $ 511 $ -- $ 511
Accounts receivable and other receivables ............................ 148 -- 148
Prepaid and other current assets ..................................... 232 -- 232
------- -------- --------
Total current assets ................................................. 891 -- 891
------- -------- --------
Non-Current assets:
Property and equipment ............................................... 83 -- 83
Other ................................................................ 708 2,314 3,022
------- -------- --------
Total non-current assets ............................................. 791 2,314 3,105
------- -------- --------
Total assets ............................................................ $ 1,682 $ 2,314 $ 3,996
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other liabilities ............................... $ 494 $ 11,222 $ 11,716
------- -------- --------
Total current liabilities ............................................ 494 11,222 11,716
------- -------- --------
Long term liabilities:
Liabilities subject to compromise .................................... 871 -- 871
Deferred revenue ..................................................... 981 -- 981
------- -------- --------
Total long term liabilities .......................................... 1,852 -- 1,852
------- -------- --------
Stockholders' deficit ................................................... (664) (8,908) (9,572)
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) .................... $ 1,682 $ 2,314 $ 3,996
======= ======== ========
9) SEGMENT INFORMATION
We derive our net sales from two operating segments: (1) Home health
services comprised of skilled nursing care and attendant care services in the
home and (2) Pharmacy services comprised of pharmaceutical management and
distribution services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies, which are contained in our
Annual Report on Form 10-K for the year ended March 31, 2003.
In May 2003, with the approval of the Bankruptcy Court, we sold certain
assets and liabilities of Trestle, our wholly owned subsidiary, which made up
our Distance Medicine Business Segment. The results of operations of Trestle
have been reported as discontinued operations in accordance with SFAS No. 144
(see Note 8).
We evaluate performance based on operating earnings of our respective
business segments; as such, there is no separately identifiable statement of
operations data below operating loss.
Our financial information by business segment is summarized as follows
(unaudited, in thousands). The "Other" column includes corporate related items
and other expenses not allocated to reportable segments. No amounts from our
former Distance Medicine Business Segment are included in this column
(unaudited, in thousands):
HOME HEALTH PHARMACY OTHER TOTAL
----------- -------- ------- -------
Three Months Ended September 30, 2003:
Net sales ....................................................... $73,185 $ 12,313 $ -- $ 85,498
Operating income (loss) before depreciation and
amortization .................................................... 6,672 768 (2,426) 5,014
Depreciation and amortization ................................... 931 238 228 1,397
Operating income (loss) income .................................. 5,741 530 (2,654) 3,617
Capital expenditures
252 182 53 487
Total assets as of September 30, 2003 ........................... $81,843 $ 43,035 $ 13,047 $ 137,925
Three Months Ended September 30, 2002:
Net sales ....................................................... $81,865 $ 13,356 $ -- $ 95,221
Operating income (loss) before depreciation and
amortization .................................................... 2,295 5 (5,469) (3,169)
Depreciation and amortization ................................... 973 259 228 1,460
Operating income (loss) ......................................... 1,322 (254) (5,697) (4,629)
Capital expenditures ............................................ 229 148 74 451
Total assets at March 31, 2003 .................................. $81,149 $ 49,801 $ 7,309 $ 138,259
19
HOME HEALTH PHARMACY OTHER TOTAL
----------- -------- ------- -------
Six Months Ended September 30, 2003:
Net sales ........................................................ $144,687 $24,954 $ -- $ 169,641
Operating income (loss) before depreciation and
amortization ..................................................... 12,051 1,105 (4,771) 8,385
Depreciation and amortization .................................... 1,885 475 476 2,836
Operating income (loss) income ................................... 10,166 630 (5,247) 5,549
Capital expenditures ............................................. 369 311 24 704
Total assets as of September 30, 2003 ............................ $ 81,843 $43,035 $ 13,047 $ 137,925
Six Months Ended September 30, 2002:
Net sales ........................................................ $165,521 $27,510 $ -- $ 193,091
Operating income (loss) before depreciation and
amortization ..................................................... 2,887 1,243 (8,883) (4,753)
Depreciation and amortization .................................... 1,966 490 468 2,924
Operating income (loss) .......................................... 921 753 (9,351) (7,677)
Capital expenditures ............................................. 475 152 77 704
Total assets at March 31, 2003 ................................... $ 81,149 $49,801 $ 7,309 $ 138,259
Our U.S. sales from our pharmacy services and home health services
segments are paid through third-party payors, including Medicare, Medicaid and
commercial insurance companies, as well as directly from institutions and
patients.
During the three and six months ended September 30, 2003, approximately
83.6% and 83.4%, respectively, of the sales from these segments were
reimbursable by Medicare and Medicaid.
10) CONTINGENCIES AND LEGAL MATTERS
As discussed in greater detail in Part I, Note 2 above, on the Petition
Date, we and five of our domestic, wholly owned subsidiaries, Chartwell, CCS,
CCG, Resource and Trestle, filed voluntary petitions in the Bankruptcy Court
under Chapter 11 of the Bankruptcy Code. The reorganization cases are being
jointly administered under the caption "In re Med Diversified, Inc., et al.,
Case No. 8-02-88564." On November 8, 2002, TLCS along with nineteen of TLCS'
subsidiaries filed voluntary petitions in the Bankruptcy Court under the
Bankruptcy Code. The reorganization cases are being jointly administered under
the caption "In re Tender Loving Care Health Care Services, Inc., et al., Case
No. 8-02-88020." All of the entities continue to operate their businesses as
debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and
in accordance with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court, while a plan of reorganization is formulated. At this
time, it is not possible to predict the outcome of the Chapter 11 cases or their
effect on our business.
In connection with our filing for bankruptcy protection, much of the
litigation noted below, if it was not settled prior to the filing for
bankruptcy, has been automatically stayed under bankruptcy law, meaning, where
we are a defendant, that no adverse party may take any action in the context of
such litigation unless such party obtains relief from the automatic stay. Where
we are the plaintiff, we may pursue such litigation at our option. Except as
described below, none of such pending litigation, in our opinion, could have a
material adverse impact on our consolidated financial condition, results of
operations or businesses.
We are subject to various claims, legal proceedings and investigations
covering a wide range of matters that arise in the ordinary course of our
business activities. Each of these matters is subject to various uncertainties,
and it is possible that some of these matters may be resolved unfavorably to us.
We have established accruals for matters that are probable and reasonably
estimable. Management believes that any liability that may ultimately result
from the resolution of these matters in excess of amounts provided will not have
a material adverse effect on our financial position, results of operations or
cash flows. We, and certain related parties, have been and continue to be
involved in litigation regarding certain of our acquisitions and strategic
relationships, material and non-material. Where we are a party to such material
litigation, a description of such litigation is set forth below.
In our Annual Report on Form 10-K for the fiscal year ended March 31,
2003, we reported on our pending legal proceedings. The following section
updates that disclosure to the extent that developments in those proceedings
have occurred since our Annual Report.
ASHE WAHBA
On April 17, 2002, Ashe Wahba ("Wahba") filed a demand for arbitration
with the American Arbitration Association ("AAA") against the Company (AAA No.
11 160 01346 2). Prior to his termination in April 2002, Wahba served as
Chartwell's President of International Business. Wahba alleges that we breached
the severance and signing compensation provisions of his
20
Executive Employment Agreement (the "Employment Agreement"), dated August 18,
2001. The Employment Agreement called for arbitration for disagreements arising
out of or relating to the Employment Agreement. Wahba seeks an award of salary
compensation, compensation for stock options, attorneys' fees and administrative
costs. Though we have taken part in settlement discussions with Wahba, no
settlement has been reached. We continue to disagree with Wahba's interpretation
of the Employment Agreement.
Due to our filing for bankruptcy protection, this matter was subject to
the automatic stay under the Bankruptcy Code. However, on February 4, 2003,
Wahba filed a motion with the Bankruptcy Court to modify the stay and allow the
arbitration to proceed. The Bankruptcy Court granted such motion. Therefore,
this matter will proceed in arbitration. Any award, however, will merely
liquidate the amount of Wahba's claim, which will remain subject to the
automatic stay and whatever treatment ultimately will be afforded the unsecured
creditors under our plan of reorganization.
This matter is currently in discovery and motions setting forth the
parties' legal positions are to be filed with the arbitrator by
December 19, 2003.
ADDUS HEALTHCARE
On or about April 24, 2002, we filed a complaint against Addus
Healthcare, Inc. ("Addus"), and its major shareholders, W. Andrew Wright, Mark
S. Heaney, Courtney E. Panzer, and James A. Wright (Med Diversified, Inc. v.
Addus Healthcare, Inc., et al., U.S. District Court, Central District of
California, Case No. CV 02-3911 AHM (JTLX)). We contend that Addus has been
unable to perform its obligations under a certain stock purchase agreement
relating to our acquisition of Addus. We allege that Addus breached the
warranties and representations it gave regarding its financial condition, and
Addus has been unable to obtain the consent of necessary third parties to assign
some relevant contracts. We believe that Addus has breached the agreement in
other ways, as well. Additionally, we allege that the Defendants have
misappropriated our deposit.
The complaint demands the imposition of a constructive trust for the
converted funds and an injunction against the Defendants' disposing of or
liquidating the $7.5 million deposit. Our complaint further alleges fraud on
behalf of the Defendants, stating that they never intended to complete the
transaction but planned to use the pendency of the transaction to obtain
concessions from us. Additionally, there is a claim for breach of contract. We
seek compensatory damages of approximately $10 million per claim, plus punitive
damages, along with the equitable relief previously described and attorneys'
fees.
Addus has filed a counterclaim against us, alleging that we (1)
fraudulently induced them to enter into the agreement, (2) negligently
misrepresented certain aspects of our business, (3) breached the terms of the
agreement by not closing the transaction and not having available funds to close
the transaction, and (4) breached certain other confidentiality agreements.
Addus has sought compensatory damages in excess of $4 million, a declaratory
judgment that it is entitled to retain the $7.5 million deposit, for general and
special damages. We dispute these claims vigorously and believe they are without
merit. On July 9, 2002, we filed a reply to the counterclaim. This matter has
been transferred to the Northern District of Illinois. On October 11, 2002, we
filed an Amended Complaint. We received Addus' answer to that complaint. A
status conference was held on November 14, 2003. We intend to continue pursuing
this litigation, and seek all available remedies.
NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., NATIONAL PREMIER FINANCIAL
SERVICES, INC., NPF VI, INC., NPF X, INC., NPF XII, INC., NPF CAPITAL, INC.
On May 30, 2003, we, along with Chartwell, CCG, CCS, and Resource,
filed a lawsuit against NCFE and five legal designees of NCFE in the Bankruptcy
Court (Med Diversified, Inc.; Chartwell Diversified Services, Inc.; Chartwell
Care Givers, Inc.; Chartwell Community Services, Inc.; and Resource Pharmacy,
Inc. v. National Century Financial Enterprises Inc.; National Premier Financial
Services, Inc.; NPF, VI, Inc.; NPF X, Inc.; NPF XII, Inc.; NPF Capital, Inc.,
United States Bankruptcy Court for the Eastern District of New York, Adversary
Proceeding No. 1-03-01320). We contend that the defendants engaged in a course
of conduct, whereby they fraudulently promised attractive returns to investors.
We believe that the defendants diverted investments and concealed the scheme by
fraudulently manipulating the use of new investments. We believe that the
defendants used us as an instrumentality to further this fraudulent conduct,
harming our estates. We also bring causes of action under theories of unjust
enrichment and fraud.
There are certain claims against us arising from transfers of funds
from the Defendants to us, including the Defendants' purported secured and
unsecured loans, purchases of receivables and other advances. We seek to
recharacterize these claims as equity interests, and to the extent that such
claims are recharacterized as equity interests, we seek to subordinate those
interests to those of the other equity holders. Further, we seek the turnover of
overfunded reserves and accrued subservicing fees by certain of the Defendants
and recovery for breach of certain sales and subservicing agreements between the
Defendants and us. We also seek recovery for the Defendants' breach of
commitments in connection with a bond initiative sponsored by PIBL, as well as
breach of the preferred provider agreement, entered into between NCFE and us in
February 2000. We also seek recovery of fraudulent transfers.
21
The defendants' answer on responsive pleadings was due on August 8,
2003 and was filed on such date. Discovery is proceeding in this matter.
STEPHEN SAVITSKY, DAVID SAVITSKY, DALE R. CLIFT
On May 16, 2003 we, along with TLCS, filed a lawsuit against Stephen
Savitsky ("S. Savitsky"), David Savitsky ("D. Savitsky"), and Dale R. Clift
("Clift") in the Bankruptcy Court (Med Diversified, Inc.; Tender Loving Care
Health Care Services, Inc. v. Stephen Savitsky; David Savitsky; Dale R. Clift,
United States Bankruptcy Court for the Eastern District of New York, Adversary
Proceeding No. 03-8244). Up until October 28, 2002, S. Savitsky served as Chief
Executive Officer of TLCS. From October 28, 2002 until his resignation on
November 6, 2002, S. Savitsky served as Executive Vice President of TLCS. Up
until or shortly after October 28, 2002, D. Savitsky served as Vice Chairman of
Governmental Affairs for TLCS. Up until February 27, 2002, Clift served as
President and Chief Operating Officer of TLCS.
We and TLCS made certain transfers and conveyances to S. Savitsky, D.
Savitsky and Clift during the course of their employment with TLCS. We and TLCS
seek to avoid and recover those transfers as preferential payments under the
Bankruptcy Code. We and TLCS also seek to avoid and recover those funds under
the theories of fraudulent transfers, fraudulent conveyances, and unjust
enrichment.
The defendants' answers were due on June 30, 2003 and were filed on
such date. Discovery is proceeding in this matter and a pretrial conference
is scheduled for November 24, 2003. The court granted the defendants' motion
for summary judgment as to TLCS, but denied it as to the Med Debtors at a
hearing held on October 20, 2003. A trial is currently docketed for December
2, 2003, but we expect that such trial date could be delayed, given the
preparation of expert testimony.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On August 19, 2003, we were served with a subpoena by the Securities
and Exchange Commission (the "SEC") in connection with an ongoing informal
inquiry. Since that date, we have been in communication with the SEC regarding
the scope of the subpoena, and have been providing documentation that is
responsive to the subpoena. We have been and shall continue to cooperate fully
with this investigation.
11) DEBTOR FINANCIALS
The following condensed consolidating balance sheet as of September 30,
2003 and March 31, 2003 and the related condensed consolidating statements of
income and statements of cash flows for the three and six months ended September
30, 2003 are presented in accordance with SOP 90-7.
Condensed Consolidating Balance Sheet
As of September 30, 2003
(unaudited, in thousands)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 15,321 $ 506 $ -- $ 15,827
Accounts receivable, net ..................................... 32,802 1,527 -- 34,329
Accounts receivable from affiliates .......................... 69 1,548 (1,554) 63
Prepayments and other current assets ......................... 5,097 2,793 -- 7,890
Assets of discontinued operations ............................ 1,101 2,186 -- 3,287
--------- ------- -------- ---------
Total current assets ......................................... 54,390 8,560 (1,554) 61,396
--------- ------- -------- ---------
Non-current assets:
Property and equipment, net .................................. 11,643 198 -- 11,841
Goodwill, net ................................................ 13,700 7,140 -- 20,840
Investments .................................................. 9,612 9,474 (9,474) 9,612
Other intangibles, net ....................................... 31,646 -- -- 31,646
Other assets ................................................. 2,139 1,651 (1,200) 2,590
--------- ------- -------- ---------
Total non-current assets ..................................... 68,740 18,463 (10,674) 76,529
--------- ------- -------- ---------
Total assets ................................................. $ 123,130 $27,023 $(12,228) $ 137,925
========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................. $ 7,305 $ 339 $ -- $ 7,644
Accrued salaries and benefit costs ........................... 17,264 162 -- 17,426
Accrued liabilities .......................................... 7,850 315 -- 8,165
Liabilities of discontinued operations ....................... 951 11,222 -- 12,173
Current maturities of capital leases ......................... 1,333 10 -- 1,343
Liabilities subject to compromise ............................ 346,557 -- -- 346,557
--------- ------- -------- ---------
Total current liabilities .................................... 381,260 12,048 -- 393,308
--------- ------- -------- ---------
Long-Term liabilities:
Capital leases ............................................... 222 15 -- 237
Other liabilities ............................................ 338 -- -- 338
--------- ------- -------- ---------
Total long-term liabilities .................................. 560 15 -- 575
--------- ------- -------- ---------
Minority interest .............................................. 127 268 -- 395
Total stockholders' deficit .................................. (258,817) 14,692 (12,228) (256,353)
--------- ------- -------- ---------
Total liabilities and stockholders' deficit .................. $ 123,130 $27,023 $(12,228) $ 137,925
========= ======= ======== =========
22
Condensed Consolidating Balance Sheet
As of March 31, 2003
(in thousands)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 9,831 $ 241 $ -- $ 10,072
Accounts receivable, net ............................................ 34,791 1,803 -- 36,594
Accounts receivable from affiliates ................................. 59 1,417 (1,290) 186
Prepayments and other current assets ................................ 7,575 272 -- 7,847
Assets of discontinued operations ................................... 891 -- -- 891
--------- ------- -------- ---------
Total current assets ................................................ 53,147 3,733 (1,290) 55,590
--------- ------- -------- ---------
Non-current assets:
Property and equipment, net ......................................... 13,624 232 -- 13,856
Goodwill, net ....................................................... 13,408 7,140 -- 20,548
Investments ......................................................... 11,231 11,094 (11,094) 11,231
Other intangibles, net .............................................. 32,042 -- -- 32,042
Assets of discontinued operations ................................... 791 2,314 -- 3,105
Other assets ........................................................ 1,869 18 -- 1,887
--------- ------- -------- ---------
Total non-current assets ............................................ 72,965 20,798 (11,094) 82,669
--------- ------- -------- ---------
Total assets ........................................................ $ 126,112 $24,531 $(12,384) $ 138,259
========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................................... $ 5,572 $ 276 $ -- $ 5,848
Accrued salaries and benefit costs .................................. 14,540 160 -- 14,700
Accrued liabilities ................................................. 8,445 441 -- 8,886
Liabilities of discontinued operations .............................. 494 11,222 -- 11,716
Current maturities of capital leases ................................ -- 10 -- 10
--------- ------- -------- ---------
Total current liabilities ........................................... 29,051 12,109 -- 41,160
--------- ------- -------- ---------
Long-Term liabilities:
Liabilities subject to compromise ................................... 356,873 -- -- 356,873
Capital leases ...................................................... -- 20 -- 20
Long-term debt and lease commitments of discontinued operations ..... -- -- -- --
Other liabilities ................................................... 1,852 -- -- 1,852
--------- ------- -------- ---------
Total long-term liabilities ......................................... 358,725 20 -- 358,745
--------- ------- -------- ---------
Minority interest ..................................................... 115 262 -- 377
Total stockholders' deficit ......................................... (261,779) 12,140 (12,384) (262,023)
--------- ------- -------- ---------
Total liabilities and stockholders' deficit ......................... $ 126,112 $24,531 $(12,384) $ 138,259
========= ======= ======== =========
23
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2003
DEBTOR NON-DEBTOR ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
NET SALES:
Non affiliates ....................................................... $ 83,643 $ 1,751 $ -- $ 85,394
Affiliates ........................................................... -- 136 (32) 104
-------- ------- ---- --------
Total net sales ................................................. 83,643 1,887 (32) 85,498
-------- ------- ---- --------
COSTS AND EXPENSES:
Cost of sales ......................................................... 46,490 1,267 -- 47,757
Selling, general and administrative ................................... 32,040 719 (32) 32,727
Depreciation and amortization ......................................... 1,357 40 -- 1,397
-------- ------- ---- --------
Total costs and expenses ........................................... 79,887 2,026 (32) 81,881
-------- ------- ---- --------
OPERATING INCOME (LOSS) ................................................. 3,756 (139) -- 3,617
OTHER INCOME (EXPENSE):
Interest expense ...................................................... (1,179) (2) -- (1,181)
Other income .......................................................... 42 (10) -- 32
-------- ------- ---- --------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS, MINORITY INTEREST
AND EQUITY IN EARNINGS OF JOINT VENTURES AND INCOME TAXES ............... 2,619 (151) -- 2,468
-------- ------- ---- --------
REORGANIZATION ITEMS .................................................... 1,571 -- -- 1,571
MINORITY INTEREST, NET OF TAXES ......................................... (4) 4 -- --
EQUITY IN EARNINGS ON JOINT VENTURES .................................... -- 1,111 -- 1,111
INCOME TAX EXPENSE ...................................................... (450) -- -- (450)
-------- ------- ---- --------
INCOME FROM CONTINUING OPERATIONS ....................................... 3,736 964 -- 4,700
LOSS FROM DISCONTINUED OPERATIONS ....................................... (113) -- -- (113)
-------- ------- ---- --------
NET INCOME .............................................................. $ 3,623 $ 964 $ -- $ 4,587
======== ======= ==== ========
Condensed Consolidating Statement of Operations
For the Six Months Ended September 30, 2003
(unaudited, in thousands)
DEBTOR NON-DEBTOR ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
NET SALES:
Non affiliates ......................................................... $ 165,861 $ 3,572 $ -- $ 169,433
Affiliates ............................................................. -- 240 (32) 208
--------- ------- ---- ---------
Total net sales ................................................... 165,861 3,812 (32) 169,641
--------- ------- ---- ---------
COSTS AND EXPENSES:
Cost of sales ........................................................... 92,046 2,437 -- 94,483
Selling, general and administrative ..................................... 65,357 1,448 (32) 66,773
Depreciation and amortization ........................................... 2,757 79 -- 2,836
--------- ------- ---- ---------
Total costs and expenses ............................................. 160,160 3,964 (32) 164,092
--------- ------- ---- ---------
OPERATING INCOME (LOSS) ................................................... 5,701 (152) -- 5,549
OTHER INCOME (EXPENSE):
Interest expense ........................................................ (2,737) (4) -- (2,741)
Other income ............................................................ 87 (6) -- 81
--------- ------- ---- ---------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS, MINORITY INTEREST AND
EQUITY IN EARNINGS OF JOINT VENTURES AND INCOME TAXES ................... 3,051 (162) -- 2,889
--------- ------- ---- ---------
REORGANIZATION ITEMS ...................................................... (266) -- -- (266)
MINORITY INTEREST, NET OF TAXES ........................................... (12) (6) -- (18)
EQUITY IN EARNINGS ON JOINT VENTURES ...................................... -- 2,688 -- 2,688
INCOME TAXES EXPENSE ...................................................... (450) -- -- (450)
--------- ------- ---- ---------
INCOME FROM CONTINUING OPERATIONS ......................................... 2,323 2,520 -- 4,843
INCOME FROM DISCONTINUED OPERATIONS ....................................... 764 -- -- 764
--------- ------- ---- ---------
NET INCOME ................................................................ $ 3,087 $ 2,520 $ -- $ 5,607
========= ======= ==== =========
24
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended September 30, 2003
(unaudited, in thousands)
DEBTOR NON-DEBTOR CONSOLIDATED
-------- ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ 3,087 $ 2,520 $ 5,607
(Gain) loss from discontinued operations ............................................. (764) -- (764)
Minority interest .................................................................... 12 6 18
Adjustments to reconcile loss from continuing operations to net cash used in
continuing operations:
Loss on disposal of fixed assets ..................................................... 290 -- 290
Equity in joint ventures ............................................................. -- (2,688) (2,688)
Non cash compensation ................................................................ 63 -- 63
Depreciation and amortization ........................................................ 2,757 79 2,836
Provision for doubtful accounts ...................................................... 2,187 16 2,203
Gain on settlement of lease obligations .............................................. (3,300) -- (3,300)
Net change in assets and liabilities affecting operations, net of acquisitions:
Accounts receivable and affiliated receivables .................................... 40 145 185
Prepayments and other assets ...................................................... 3,397 (4,154) (757)
Accounts payable and accrued liabilities .......................................... 557 (41) 516
Other liabilities ................................................................. 296 -- 296
-------- ------- --------
Net cash provided by (used in) operating activities .................................. 8,622 (4,117) 4,505
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................................. (659) (45) (704)
Change in assets and liabilities of discontinued operations, net ..................... (1,300) 128 (1,172)
Restricted cash received from sale of discontinued operations ........................ 1,250 -- 1,250
Distributions received ............................................................... -- 1,230 1,230
Distributions from joint ventures subject to restriction ............................. -- 3,074 3,074
Business acquisitions net of cash acquired ........................................... (292) -- (292)
-------- ------- --------
Net cash (used in) provided by investing activities .................................. (1,001) 4,387 3,386
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on long term debt and related party debt ................................ (1,360) -- (1,360)
Net repayments of capital lease obligations .......................................... (771) (5) (776)
-------- ------- --------
Net cash used in financing activities ................................................ (2,131) (5) (2,136)
-------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS .................................................. 5,490 265 5,755
-------- ------- --------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD ............................... 9,831 241 10,072
-------- ------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD ..................................... $ 15,321 $ 506 $ 15,827
======== ======= ========
NON-CASH TRANSACTIONS:
Liabilities assumed by purchaser of discontinued operations .......................... $ 1,421 $ -- $ 1,421
======== ======= ========
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Part I, Item 2 of this report should be read in conjunction with Part
II, Item 7 of our Annual Report on Form 10-K for the year ended March 31, 2003.
Statements in this quarterly report that relate to management's
expectations, intentions or beliefs concerning future plans, expectations,
events and performance are "forward-looking" within the meaning of the federal
securities laws. Forward looking statements do not relate strictly to historical
or current facts and may be identified by their use of words like "plan",
"believe", "expect", "will", "anticipate", "estimate" and other words of similar
meaning. These forward-looking statements include assumptions, beliefs and
opinions relating to our business and growth strategy based upon management's
interpretation and analysis of its own contractual and legal rights, of
management's ability to satisfy industry and consumer needs with its strategies,
and of healthcare industry trends. Management's forward-looking statements
further assume that we will be able to successfully develop and execute on our
strategic relationships and obtain approval for a plan of reorganization under
the terms of the Bankruptcy Code. Actual results or events could differ
materially from those anticipated in the forward-looking statements due to a
variety of factors, in addition to those set out above, including, without
limitation, acceptance by customers of our products, changing technology,
competition in the health-care market, government regulation of health care,
general economic conditions, availability of capital, the outcome of pending
litigation, our ability to successfully reorganize under the Bankruptcy Code and
other factors. Investors should not rely on forward looking statements because
they are subject to a variety of risks, uncertainties, and other factors that
could cause actual results to differ materially from our expectations. Some
important factors that could cause our actual results to differ materially from
those projected in such forward-looking statements are discussed in our Annual
Report on Form 10-K for the year ended March 31, 2003.
RESULTS OF CONTINUING OPERATIONS
The results of continuing operations presented herein reflect the
consolidated net sales and expenses from continuing operations for the three and
six months ended September 30, 2003 and 2002 (unaudited, in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
---------- ---------
Net Sales ........................................ $ 85,498 $ 95,221
Costs and expenses:
Cost of sales ................................ 47,757 54,452
General and administrative ................... 32,727 43,938
Depreciation and amortization ................ 1,397 1,460
--------- ---------
Total costs and expenses ......................... 81,881 99,850
--------- ---------
Operating income (loss) from continuing operations $ 3,617 $ (4,629)
========= =========
Net income (loss) from continuing operations ..... $ 4,700 $ (10,183)
========= =========
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
--------- ---------
Net Sales ........................................ $ 169,641 $ 193,031
Costs and expenses:
Cost of sales ................................ 94,483 109,416
General and administrative ................... 66,773 88,368
Depreciation and amortization ................ 2,836 2,924
--------- ---------
Total costs and expenses ......................... 164,092 200,708
--------- ---------
Operating income (loss) from continuing
operations ..................................... $ 5,549 $ (7,677)
========= =========
Net income (loss) from continuing operations ..... $ 4,843 $ (25,205)
========= =========
The following table summarizes the operations for Chartwell and
subsidiaries and the statements of operations of non-majority joint ventures,
which are managed by Chartwell for the three and six months ended September 30,
2003 and 2002 (unaudited, in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
CHARTWELL JOINT VENTURES* CHARTWELL JOINT VENTURES*
--------- --------------- --------- --------------
Net Sales $ 23,859 $ 16,941 $ 24,858 $ 18,804
Cost of Sales 17,609 9,758 18,291 11,075
-------- -------- -------- --------
Gross Profit 6,250 7,183 6,567 7,729
Operating expenses 4,620 4,720 5,483 5,367
-------- -------- -------- --------
Income from operations 1,630 2,463 1,084 2,362
Depreciation and amortization (262) (238) (244) (424)
Other income (expense) (238) 191 (1,291) 8
Equity in earnings of joint venture 1,111 -- 887 --
Joint venture earnings allocated to other members -- (1,305) -- (1,059)
-------- -------- -------- --------
Net income $ 2,241 $ 1,111 $ 436 $ 887
======== ======== ======== ========
26
SIX MONTHS ENDED SEPTEMBER 30, 2003 SIX MONTHS ENDED SEPTEMBER 30, 2002
CHARTWELL JOINT VENTURES* CHARTWELL JOINT VENTURES*
--------- -------------- --------- --------------
Net Sales $ 47,305 $ 37,146 $ 49,992 $ 37,035
Cost of Sales 34,543 22,005 36,512 21,795
-------- -------- -------- --------
Gross Profit 12,762 15,141 13,480 15,240
Operating expenses 9,125 9,583 10,370 10,558
-------- -------- -------- --------
Income from operations 3,637 5,558 3,110 4,682
Depreciation and amortization (514) (453) (478) (709)
Other income (expense) (434) 659 (2,180) --
Equity in earnings of joint venture 2,688 -- 1,793 --
Joint venture earnings allocated to other members -- (3,076) -- (2,180)
-------- -------- -------- --------
Net income $ 5,377 $ 2,688 $ 2,245 $ 1,793
======== ======== ======== ========
As noted above, Chartwell's income from operations under management for
the three months ended September 30, 2003 and 2002 totaled $1.1 million and $887
thousand, respectively, and Chartwell's income from operations under management
for the six months ended September 30, 2003 and 2002 totaled $2.7 million and
$1.8 million, respectively.
* Chartwell's ownership in the joint ventures ranges from 45% to 50%. As a
result of the Chartwell merger, we have investments in eight joint ventures with
various health care providers that provide home care services, including
high-tech infusion therapy, nursing, clinical respiratory services and durable
medical equipment to home care patients. Our ownership in the joint ventures
includes: one with 80 percent interest which is consolidated, one with 45
percent interest and six with 50 percent interest accounted for on the equity
basis of accounting. Total Chartwell revenue under management for the three and
six months ended September 30, 2003, which includes unconsolidated joint
ventures as well as Chartwell subsidiary revenue, was $40.8 million and $84.5
million, respectively.
NET SALES
Net sales for the three and six months ended September 30, 2003 and
2002 are summarized as follows (unaudited, in thousands):
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
SEGMENT 2003 2002 2003 2002
------- ---------------- --------------- -------------- ----------
Home Health/Alternate Site Services $ 73,185 $ 81,865 $ 144,687 $165,521
Pharmacy Management and Distribution 12,313 13,356 24,954 27,510
---------------- -------- --------- ---------
Total $ 85,498 $ 95,221 $ 169,641 $ 193,031
================ ======== ========= ==========
Home Health/Alternate Site Services revenues decreased $8.7 million or
10.6% from $81.9 million to $73.2 million for the three months ended September
30, 2003 over the comparable prior year. This decrease consists of a reduction
in revenue of $2.3 million resulting from the sale or closure of 14 locations
from our TLCS subsidiary and approximately $6.5 million primarily from changes
in payor mix, particularly at TLCS. Similarly, Home Health/Alternate Site
Services revenues decreased $20.9 million or 12.6% for the six months ended
September 30, 2003 over the comparable prior year. The decrease in the six
months ended September 30, 2003 is comprised of $7.0 million resulting from the
sale or closure of 14 locations from our TLCS subsidiary and approximately $13.9
million from changes in payor mix. The Home Health/Alternate Site Services
segment has continued taking steps to reduce business with low margin payor
sources and concurrently expand services to Medicare eligible patients, for whom
we have clinical platforms that are cost effective and generate improved gross
margins.
Pharmacy Management and Distribution revenues decreased $1.0 million
or 7.8% for the three months ended September 30, 2003 and 2002. This decrease
is due primarily to our reduction in referrals and focusing on higher-margin
therapies. This segment also continues to take steps to reduce business from
low-margin referral sources and expand its services to referral sources with
higher-margin therapies.
27
COSTS AND EXPENSES
Cost of sales for the three and six months ended September 30, 2003 and
2002 are summarized as follows (unaudited, in thousands):
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
SEGMENT 2003 2002 2003 2002
------- ---------------- ----------- ----------- --------
Home Health/Alternate Site Services $ 39,816 $ 45,687 $ 78,885 $ 91,952
Pharmacy Management and Distribution 7,941 8,765 15,598 17,464
----------- -------- --------- --------
Total $ 47,757 $ 54,452 $ 94,483 $109,416
=========== ======== ========= ========
Cost of sales as a percentage of sales for the three and six months
ended September 30, 2003 and 2002 are summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
SEGMENT 2003 2002 2003 2002
------- ---------- --------- ----------- ----------
Home Health/Alternate Site Services 54.4% 55.8% 54.5% 55.6%
Pharmacy Management and Distribution 64.5% 65.6% 62.5% 63.5%
Both Home Health/Alternate Site Services and Pharmacy Management and
Distribution cost of sales decreased in the three and six months ended September
30, 2003 as compared to the same periods in 2002 because of reduced sales. The
reduction in cost of sales as a percentage of sales reflects the previously
mentioned focus on more profitable payor and therapy mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased $11.2
million or 25.5% for the three months ended September 30, 2003 and $21.6 million
or 24.4% for the six months ended September 30, 2003, as compared to the
comparable periods in 2002. The decreases are attributed to the full impact of
certain cost reduction programs implemented in 2002, especially at our TLCS
subsidiary, which included the sale or closure of fourteen locations, reduction
in personnel and related costs in its operating locations, regional support and
corporate office. Additionally, a decrease of $1.7 million and $5.0 million,
respectively, related to executive non-cash compensation and a reduction in
professional fees (classified as SG&A expenses) favorably impacted SG&A expenses
for the three and six months ended September 30, 2003.
OTHER INCOME (EXPENSE)
Interest expense decreased $6.1 and $17.4 million, respectively, for
the three and six months ended September 30, 2003. These decreases are
attributed primarily to the reduction of $5.9 million in deferred financing fees
from 2002 and reduced interest charges related to certain pre-petition unsecured
debt, as prescribed by SOP 90-7.
RESULTS OF DISCONTINUED OPERATIONS
In May 2003, with the approval of the Bankruptcy Court, we sold certain
assets and liabilities of Trestle, our wholly owned subsidiary, which made up
our Distance Medicine Solutions Business Segment, to Trestle Acquisition
Corporation, a wholly owned subsidiary of Sunland Entertainment Co., Inc. The
transaction included the sale of all of Trestle's intellectual property rights,
certain operating assets plus the assumption of certain liabilities totaling
approximately $1.4 million. Cash proceeds from the sale of $1.25 million will
remain in escrow pending completion of our plan of reorganization. A portion of
the proceeds is currently being used to pay professional fees associated with
the Trestle sale and fees associated with our continuing bankruptcy proceedings.
As of September 30, 2003, net remaining proceeds of $1.1 million is included in
assets of discontinued operations on the Condensed Consolidated Balance Sheet.
In accordance with SFAS No. 144, the results of operations have been reported as
discontinued operations.
In June 2001, e-Net Technology, Ltd. ("e-Net") filed for receivership.
In accordance with the Emerging Issues Task Force ("EITF") Abstract No. 95-18,
ACCOUNTING AND REPORTING FOR A DISCONTINUED BUSINESS SEGMENT WHEN THE
MEASUREMENT DATE OCCURS AFTER THE BALANCE SHEET DATE BUT BEFORE THE ISSUANCE OF
FINANCIAL STATEMENTS ("EITF 95-18"), we reflected the discontinued operations in
the fiscal year ended March 31, 2001.
For further information regarding our discontinued operations, please
see Part I, Note 8 of this quarterly report.
28
LIQUIDITY
There are significant uncertainties about our ability to continue as a
going concern. We have incurred accumulated losses of $678.3 million since our
inception, including $417.3 million of goodwill and asset impairment charges.
While we have reported net income for the three and six months ended September
30, 2003, there are no guarantees that we will be profitable in the future.
In addition, we have historically had negative working capital and cash
flow from continuing operations, and lower than anticipated levels of cash
($15.8 million and $10.1 million of cash and cash equivalents at September 30,
2003 and March 31, 2003, respectively).
Until recently, we have consistently used cash in operations, including
cash used in operating activities of $21.3 million in the fiscal year ended
March 31, 2003. However, during the six months ended September 30, 2003, cash
provided by operating activities approximated $4.4 million, primarily due to the
net income for the period and non-cash charges, such as bad debt expenses of
$2.2 million, non cash compensation and expenses of $63 thousand and by
depreciation and amortization expense of $3.0 million. Sources of cash
attributable to the net change in operating assets and liabilities of $251
thousand primarily relate to the increase in accounts payable and accrued
expenses and the change in prepayments and other assets during the period.
During the six months ended September 30, 2002, cash used in operating
activities of $25.8 million was primarily due to the net loss from the period of
$27.7 million and the cash used by the net change in operating assets and
liabilities of $15 million.
We are authorized under the Bankruptcy Code to act as a
debtor-in-possession during the course of the bankruptcy case. Being a
debtor-in-possession means that current management, the board of directors and
the shareholders remain in place during the pendency of the case or until such
time as an examiner or trustee is appointed. Notwithstanding motions by the
Office of the U.S. Trustee to place the Debtors under the supervision of a
trustee, no trustee or examiner has been appointed in our case, although it is
possible that one might be appointed at a future time.
In connection with being a debtor-in-possession, we obtained financing
from Sun Capital. By order of the bankruptcy court dated December 23, 2002, Sun
Capital has been approved to act as our source for outside financing in order
for us to make up potential gaps in our cash flow during the course of our
bankruptcy. For the three and six months ended September 30, 2003, CCG has sold
approximately $5.2 million and $11.4 million, respectively, worth of receivables
to Sun Capital and has received advances in the amount of $4.2 million and $9.1
million, respectively. Receivables sold in excess of advances are reported net
of fees in prepayments and other assets in our Condensed Consolidated Balance
Sheet in this Form 10-Q for the quarter ended September 30, 2003.
During the six months ended September 30, 2003 and 2002, cash provided
in investing activities of $3.5 million and $1.1 million, respectively, was
primarily from distributions from our joint ventures.
During the six months ended September 30, 2003, we repaid cash from
financing activities of approximately $2.1 million, primarily due to net
payments from credit facilities. During the six months ended September 30, 2002,
cash of $24.7 million provided by financing activities was primarily due to
borrowings from credit facilities.
The following represents a summary of our estimated contractual
obligations and commercial commitments:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
----------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- ---------------- --------- --------- -------------
Indebtedness $239,893 $239,893 $ -- $ -- $ --
Capital lease obligations 1,831 1,516 315 -- --
Operating lease 10,486 5,013 5,284 159 30
Unconditional purchase obligations -- -- -- -- --
Other long-term obligations 51,488 51,103 338 47 --
-------- -------- -------- -------- --------
Total contractual cash obligations $303,698 $297,525 $ 5,937 $ 206 $ 30
======== ======== ======== ======== ========
Due to the failure to make scheduled payments and the commencement of
Chapter 11 proceedings, we are in default of substantially all of our
pre-petition debt and other long-term obligations. Under Chapter 11 of the
Bankruptcy Code, actions against the Debtors to collect pre-petition
indebtedness are subject to an automatic stay provision. These debt obligations
at March 31, 2003 and September 30, 2003 are classified as liabilities subject
to compromise in the accompanying Condensed Consolidated Balance Sheets in
accordance with SOP 90-7.
29
Letters of Credit are purchased guarantees that ensure our performance
or payment to third parties in accordance with specified terms and conditions.
The following table presents our letters of credit for amounts committed but not
drawn-down. These instruments may exist or expire without being drawn-down.
Therefore, the amounts committed but not drawn-down, do not necessarily
represent future cash flows.
PAYMENTS DUE BY
PERIOD
(IN THOUSANDS)
---------------
OTHER COMMERCIAL OBLIGATIONS TOTAL AMOUNTS COMMITTED LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ---------------------------- ----------------------- ---------------- --------- --------- -------------
Letters of credit $ 515 $ 515 $ -- $ -- $ --
On August 12, 2000, our board of directors approved the repurchase in
the open market of up to 2 million shares of our common stock over an
eighteen-month period. During the fiscal year ended March 31, 2002, 273 thousand
shares were acquired for approximately $429 thousand and during the fiscal year
ended March 31, 2001, 187 thousand shares were acquired for approximately $937
thousand. No subsequent repurchases have been made and none are currently
contemplated.
On August 18, 2001, we entered into two offshore financing agreements
with Societe Financiere du Seujet, Limited ("SFSL"), a Securities Purchase
Agreement and a Debenture and Equity Agreement, providing for up to $83 million
financing and $54 million in debenture financing, respectively. No funding was
provided under either of these agreements. In August 2002, in conjunction with
the Company's $70 million debenture refinancing, these agreements were
terminated.
DEBENTURES
In addition to the above-mentioned agreements with SFSL, we entered
into a series of ten short form convertible debentures, dated September 5, 2001
(some of which were amended as of September 10, 2001), with SFSL and its
affiliate, Sangate. On October 1, 2001, a total of $40 million, less a
commission of $3.7 million, was funded and 13.2 million shares of our common
stock were pledged and were issuable as collateral of these debentures. The
funds were raised principally to fund the planned acquisition of TLCS. In
December 2001, these debentures were paid off with the proceeds of new
debentures and the pledged shares were released and repledged to holders of the
new debentures.
On December 28, 2001, debentures 1 and 2 were funded for a total of $40
million and the aggregate amount of 13.2 million shares were pledged to PIBL as
collateral for the repayment of debentures 1 and 2. The proceeds of debentures 1
and 2 were used to retire certain of our outstanding debentures with SFSL with a
maturity date of December 20, 2001. On December 28, 2001, debentures 3, 4 and 5
were funded for a total of $30 million. In connection with funding of debentures
3, 4 and 5, we entered into a Commission Agreement pursuant to which, as
consideration for arranging for the financing, we provided SFSL with a
commission of $2.7 million, 3 million shares of our common stock and a warrant
to purchase an additional 2 million shares of our common stock at a purchase
price of $4.20 per share. Additionally, 10 million shares of our common stock
were pledged to SFSL as collateral for the January 4, 2002 funding and SFSL has
the right to purchase bondholder position rights of the 10 million shares at
$3.00 per share.
In August 2002, we reached an agreement to refinance the $70 million of
original debentures issued by Private Investment Bank, Limited ("PIBL") held by
the holders of our outstanding debentures (the "Debenture Holders"). Pursuant to
the agreement entered into with PIBL, as agent for the Debenture Holders, we
issued five new amended debentures with a total principal balance of $57.5
million. The new debentures mature on June 28, 2004 unless there is an event of
default that would cause acceleration of the amount due. The original
debentures, which totaled $70 million and were due on June 28, 2002, have been
cancelled. The reduced total of the new debentures reflects the $12.5 million of
principal represented by a contractually subordinated debenture that was
purchased by TEGCO Investments, LLC ("TegCo"). The new agreement is subject to
standard terms and conditions including a schedule of payment obligations and
the grant security interests in our assets. Also refer to our Form 8-K, dated
August 19, 2002, reported under Item 5 the refinance of $70 million debentures
held by PIBL. Due to our filing for bankruptcy protection, we are technically in
default under these agreements.
On June 9, 2003, Chartwell Home Therapies, L.P. ("CHT") and Chartwell
Management Company, Inc. ("CMC") entered into a Proceeds Distribution Agreement
with PIBL. Under the terms of this agreement, CHT has agreed to split proceeds
with PIBL from cash distributions from joint ventures owned by CHT. CHT and CMC
have also granted to PIBL a security interest in all such proceeds and on
substantially all of the assets of CHT and CMC. PIBL has agreed to remove
permanently certain liens it placed on the joint ventures. The obligations to
split proceeds from distributions terminate at the time when a reorganization
plan is confirmed in our Bankruptcy Case.
Going forward, our principal focus will be to generate positive cash
flow from our continuing operations primarily from our business units. We plan
to continue to eliminate redundancies at all staff levels and locations
consistent with this objective.
30
In order for us to continue our operations, we must be successful in
obtaining additional funding by 1) maintaining our arrangement with Sun Capital
as our source for debtor-in-possession financing; 2) successfully managing the
reorganization of the TLCS and Med Debtors; and 3) preparing, filing and
obtaining approval of plans of reorganization for the Med Debtors.
Other factors, including those risk factors identified in our Form 10-K
for the fiscal year ended March 31, 2003, adversely affect our ability to obtain
additional funding.
Our independent auditors stated in their "Report of Independent
Accountants" on our consolidated financial statements as of and for the years
ended March 31, 2003, 2002 and 2001 that there is substantial doubt about our
ability to continue as a going concern.
We may be unable to raise any additional amounts on reasonable terms,
or at all, when needed. If we are unable to raise such additional funding, we
would have to curtail operations, which in turn would have an adverse effect on
our financial position and results of operations and our ability to operate.
CAPITAL EXPENDITURES
There were no material commitments for capital expenditures during the
quarter ended September 30, 2003, and no material commitments are anticipated in
the near future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET/PRICE RISK
We are exposed to market risk in the normal course of business
operations. We face competition and must offer our products and services at
prices the market will bear. Management believes that we are well positioned
with our mix of products and services to take advantage of future price
increases for these products and services. However, should the prices for our
products or services decline, this could adversely affect our future
profitability and competitiveness.
INTEREST RATE RISK
Our debt portfolio as of September 30, 2003 is composed entirely of
fixed and variable rate debt denominated in United States currency. Changes in
interest rates have different impacts on the fixed and variable rate portions of
our debt portfolio. A change in interest rate on the variable portion of the
debt portfolio impacts the interest incurred and cash flows but does not impact
the net financial instrument position. If interest rates significantly increase,
we could incur additional interest expenses, which would negatively affect its
cash flow and future profitability.
ITEM 4. CONTROLS AND PROCEDURES.
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as defined in Exchange
Act Rule 13a-14 under supervision and with the participation of management,
including our Chief Executive Officer, Chief Operating Officer and Chief
Accounting Officer, within 90 days of filing this report. Based upon that
evaluation, our Chief Executive Officer, Chief Operating Officer and Chief
Accounting Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation. The design of any future system of controls and procedures is based
in part upon certain assumptions about the likelihood of future events. There
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions regardless of how remote.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As discussed in greater detail in Part I, Note 2 above, on the Petition
Date, we and five of our domestic, wholly owned subsidiaries, Chartwell, CCS,
CCG, Resource and Trestle, filed voluntary petitions in the Bankruptcy Court
under Chapter 11 of the Bankruptcy Code. The reorganization cases are being
jointly administered under the caption "In re Med Diversified, Inc., et al.,
Case No. 8-02-88564." On November 8, 2002, TLCS along with nineteen of TLCS'
subsidiaries filed voluntary petitions in the Bankruptcy
31
Court under the Bankruptcy Code. The reorganization cases are being jointly
administered under the caption "In re Tender Loving Care Health Care Services,
Inc., et al., Case No. 8-02-88020." All of the entities continue to operate
their businesses as debtors-in-possession, subject to the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court, while a plan of
reorganization is formulated. At this time, it is not possible to predict the
outcome of the Chapter 11 cases or their effect on our business.
In connection with our filing for bankruptcy protection, much of the
litigation noted below, if it was not settled prior to the filing for
bankruptcy, has been automatically stayed under bankruptcy law, meaning, where
we are a defendant, that no adverse party may take any action in the context of
such litigation unless such party obtains relief from the automatic stay. Where
we are the plaintiff, we may pursue such litigation at our option. Except as
described below, none of such pending litigation, in our opinion, could have a
material adverse impact on our consolidated financial condition, results of
operations or businesses.
We are subject to various claims, legal proceedings and investigations
covering a wide range of matters that arise in the ordinary course of our
business activities. Each of these matters is subject to various uncertainties,
and it is possible that some of these matters may be resolved unfavorably to us.
We have established accruals for matters that are probable and reasonably
estimable. Management believes that any liability that may ultimately result
from the resolution of these matters in excess of amounts provided will not have
a material adverse effect on our financial position, results of operations or
cash flows. We, and certain related parties, have been and continue to be
involved in litigation regarding certain of our acquisitions and strategic
relationships, material and non-material. Where we are a party to such material
litigation, a description of such litigation is set forth below.
In our Annual Report on Form 10-K for the fiscal year ended March 31,
2003, we reported on our pending legal proceedings. The following section
updates that disclosure to the extent that developments in those proceedings
have occurred since our Annual Report.
ASHE WAHBA
On April 17, 2002, Ashe Wahba ("Wahba") filed a demand for arbitration
with the American Arbitration Association ("AAA") against the Company (AAA No.
11 160 01346 2). Prior to his termination in April 2002, Wahba served as
Chartwell's President of International Business. Wahba alleges that we breached
the severance and signing compensation provisions of his Executive Employment
Agreement (the "Employment Agreement"), dated August 18, 2001. The Employment
Agreement called for arbitration for disagreements arising out of or relating to
the Employment Agreement. Wahba seeks an award of salary compensation,
compensation for stock options, attorneys' fees and administrative costs. Though
we have taken part in settlement discussions with Wahba, no settlement has been
reached. We continue to disagree with Wahba's interpretation of the Employment
Agreement.
Due to our filing for bankruptcy protection, this matter was subject to
the automatic stay under the Bankruptcy Code. However, on February 4, 2003,
Wahba filed a motion with the Bankruptcy Court to modify the stay and allow the
arbitration to proceed. The Bankruptcy Court granted such motion. Therefore,
this matter will proceed in arbitration. Any award, however, will merely
liquidate the amount of Wahba's claim, which will remain subject to the
automatic stay and whatever treatment ultimately will be afforded the unsecured
creditors under our plan of reorganization.
This matter is currently in discovery and motions setting forth the
parties' legal positions are to be filed with the arbitrator by
December 19, 2003.
ADDUS HEALTHCARE
On or about April 24, 2002, we filed a complaint against Addus
Healthcare, Inc. ("Addus"), and its major shareholders, W. Andrew Wright, Mark
S. Heaney, Courtney E. Panzer, and James A. Wright (Med Diversified, Inc. v.
Addus Healthcare, Inc., et al., U.S. District Court, Central District of
California, Case No. CV 02-3911 AHM (JTLX)). We contend that Addus has been
unable to perform its obligations under a certain stock purchase agreement
relating to our acquisition of Addus. We allege that Addus breached the
warranties and representations it gave regarding its financial condition, and
Addus has been unable to obtain the consent of necessary third parties to assign
some relevant contracts. We believe that Addus has breached the agreement in
other ways, as well. Additionally, we allege that the Defendants have
misappropriated our deposit.
The complaint demands the imposition of a constructive trust for the
converted funds and an injunction against the Defendants' disposing of or
liquidating the $7.5 million deposit. Our complaint further alleges fraud on
behalf of the Defendants, stating that they never intended to complete the
transaction but planned to use the pendency of the transaction to obtain
concessions from us. Additionally, there is a claim for breach of contract. We
seek compensatory damages of approximately $10 million per claim, plus punitive
damages, along with the equitable relief previously described and attorneys'
fees.
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Addus has filed a counterclaim against us, alleging that we (1)
fraudulently induced them to enter into the agreement, (2) negligently
misrepresented certain aspects of our business, (3) breached the terms of the
agreement by not closing the transaction and not having available funds to close
the transaction, and (4) breached certain other confidentiality agreements.
Addus has sought compensatory damages in excess of $4 million, a declaratory
judgment that it is entitled to retain the $7.5 million deposit, for general and
special damages. We dispute these claims vigorously and believe they are without
merit. On July 9, 2002, we filed a reply to the counterclaim. This matter has
been transferred to the Northern District of Illinois. On October 11, 2002, we
filed an Amended Complaint. We received Addus' answer to that complaint. A
status conference was held on November 14, 2003. We intend to continue pursuing
this litigation, and seek all available remedies.
NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., NATIONAL PREMIER FINANCIAL
SERVICES, INC., NPF VI, INC., NPF X, INC., NPF XII, INC., NPF CAPITAL, INC.
On May 30, 2003, we, along with Chartwell, CCG, CCS, and Resource,
filed a lawsuit against NCFE and five legal designees of NCFE in the Bankruptcy
Court (Med Diversified, Inc.; Chartwell Diversified Services, Inc.; Chartwell
Care Givers, Inc.; Chartwell Community Services, Inc.; and Resource Pharmacy,
Inc. v. National Century Financial Enterprises Inc.; National Premier Financial
Services, Inc.; NPF, VI, Inc.; NPF X, Inc.; NPF XII, Inc.; NPF Capital, Inc.,
United States Bankruptcy Court for the Eastern District of New York, Adversary
Proceeding No. 1-03-01320). We contend that the defendants engaged in a course
of conduct, whereby they fraudulently promised attractive returns to investors.
We believe that the defendants diverted investments and concealed the scheme by
fraudulently manipulating the use of new investments. We believe that the
defendants used us as an instrumentality to further this fraudulent conduct,
harming our estates. We also bring causes of action under theories of unjust
enrichment and fraud.
There are certain claims against us arising from transfers of funds
from the Defendants to us, including the Defendants' purported secured and
unsecured loans, purchases of receivables and other advances. We seek to
recharacterize these claims as equity interests, and to the extent that such
claims are recharacterized as equity interests, we seek to subordinate those
interests to those of the other equity holders. Further, we seek the turnover of
overfunded reserves and accrued subservicing fees by certain of the Defendants
and recovery for breach of certain sales and subservicing agreements between the
Defendants and us. We also seek recovery for the Defendants' breach of
commitments in connection with a bond initiative sponsored by PIBL, as well as
breach of the preferred provider agreement, entered into between NCFE and us in
February 2000. We also seek recovery of fraudulent transfers.
The defendants' answer on responsive pleadings was due on August 8,
2003 and was filed on such date. Discovery is proceeding in this matter.
STEPHEN SAVITSKY, DAVID SAVITSKY, DALE R. CLIFT
On May 16, 2003 we, along with TLCS, filed a lawsuit against Stephen
Savitsky ("S. Savitsky"), David Savitsky ("D. Savitsky"), and Dale R. Clift
("Clift") in the Bankruptcy Court (Med Diversified, Inc.; Tender Loving Care
Health Care Services, Inc. v. Stephen Savitsky; David Savitsky; Dale R. Clift,
United States Bankruptcy Court for the Eastern District of New York, Adversary
Proceeding No. 03-8244). Up until October 28, 2002, S. Savitsky served as Chief
Executive Officer of TLCS. From October 28, 2002 until his resignation on
November 6, 2002, S. Savitsky served as Executive Vice President of TLCS. Up
until or shortly after October 28, 2002, D. Savitsky served as Vice Chairman of
Governmental Affairs for TLCS. Up until February 27, 2002, Clift served as
President and Chief Operating Officer of TLCS.
We and TLCS made certain transfers and conveyances to S. Savitsky, D.
Savitsky and Clift during the course of their employment with TLCS. We and TLCS
seek to avoid and recover those transfers as preferential payments under the
Bankruptcy Code. We and TLCS also seek to avoid and recover those funds under
the theories of fraudulent transfers, fraudulent conveyances, and unjust
enrichment.
The defendants' answers were due on June 30, 2003 and were filed on
such date. Discovery is proceeding in this matter and a pretrial conference
is scheduled for November 24, 2003. The court granted the defendants' motion
for summary judgment as to TLCS, but denied it as to the Med Debtors at a
hearing held on October 20, 2003. A trial is currently docketed for December
2, 2003, but we expect that such trial date could be delayed, given the
preparation of expert testimony.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On August 19, 2003, we were served with a subpoena by the Securities
and Exchange Commission (the "SEC") in connection with an ongoing informal
inquiry. Since that date, we have been in communication with the SEC regarding
the scope of the subpoena, and have been providing documentation that is
responsive to the subpoena. We have been and shall continue to cooperate fully
with this investigation.
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ITEM 2. CHANGES IN SECURITIES.
During the three months ended September 30, 2003, we did not engage in
any transactions involving the issuance of unregistered shares of our common
stock or any other securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Med Debtors made their Chapter 11 filings on November 27, 2002. As
a result of the filings, no principal or interest payments have been or will be
made on certain indebtedness incurred by the Med Debtors prior to November 27,
2002, until a plan of reorganization defining the payment terms has been
approved by the Bankruptcy Court. Additional information regarding the Med
Debtors' Chapter 11 filings is set forth elsewhere in this Form 10-Q, including
Notes 1 and 3 to the Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
TLCS and nineteen of its subsidiaries made their Chapter 11 filings on
November 8, 2002. As a result of the filings, no principal or interest payments
have been or will be made on certain indebtedness incurred by the Med Debtors
prior to November 8, 2002, until a plan of reorganization defining the payment
terms has been approved by the Bankruptcy Court. Additional information
regarding the Med Debtors' Chapter 11 filings is set forth elsewhere in this
Form 10-Q, including Notes 1 and 3 to the Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 2003 Annual Meeting of Stockholders, the Company's common
stockholders elected three members to the Board of Directors for a one-year
term, expiring at the 2004 Annual Meeting of Stockholders. The following is a
tabulation of the votes for the election of directors:
DIRECTOR NOMINEES FOR WITHHOLD
Frank P. Magliochetti, Jr. 90,000,253 2,819,122
Donald H. Ayers 80,324,807 12,494,568
Gregory J. Simms 89,067,629 3,751,746
At the 2003 Annual Meeting of Stockholders, the Company's common
stockholders ratified the selection of Brown & Brown, LLP ("Brown & Brown")
as the Company's independent auditors for the fiscal year ending March 31,
2004. The following is a tabulation of the votes for the ratification of
Brown & Brown:
FOR AGAINST ABSTAIN
90,674,064 2,023,728 121,583
ITEM 5. OTHER INFORMATION.
REQUEST FOR MODIFIED SEC REPORTING
On October 16, 2003, we formally requested that the Securities and
Exchange Commission (the "SEC") allow us to cease filing quarterly and annual
reports under the Securities Exchange Act of 1934 (the "Exchange Act").
Instead, we proposed to file with the SEC, under cover of a Form 8-K Current
Report, copies of the periodic financial reports that we are required to file
with the Bankruptcy Court and the United States Trustee pursuant to
Bankruptcy Rule 2015 and the United States Trustee's "Operating Guidelines
and Financial Reporting Requirements."
We advised the SEC that compliance with the reporting requirements
of the Exchange Act imposes a significant burden on us, our creditors and our
bankruptcy estate. We noted that our liabilities to creditors greatly exceed
our assets. Among other things, we also advised the SEC that (i) our
resources are extremely limited, (ii) our stockholders are unlikely to receive
any value from the sale of our businesses and (iii) expending additional
resources is contrary to our best interest.
On November 18, 2003, after discussions with SEC staff at the SEC's
Office of Chief Counsel, we learned that the SEC staff intends to deny our
request. Among other things, the SEC staff based its decision on our trading
volume, historic SEC filings, and the SEC's pending formal investigation.
Accordingly, we plan to continue to comply with our SEC reporting
obligations under the Exchange Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
31.1 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(B) REPORTS ON FORM 8-K
We filed a Form 8-K on August 22, 2003, reporting under Item 5 that on
August 21, 2003, we issued a press release announcing that we received a
subpoena as part of a formal inquiry by the Securities and Exchange Commission.
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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.
Med Diversified, Inc.
By: /s/ Frank P. Magliochetti, Jr.
-------------------------------
Frank P. Magliochetti, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 19, 2003
By: /s/ James A. Shanahan, III
---------------------------------
James A. Shanahan, III
Vice President of Finance and Accounting
and Corporate Controller (Principal
Accounting Officer)
Date: November 19, 2003
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