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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-22162
CARECENTRIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3209241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2625 CUMBERLAND PARKWAY, SUITE 310 30339
ATLANTA, GEORGIA (zip code)
(Address of principal
executive offices)
(Registrant's telephone number, including area code) (678) 264-4400
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Outstanding at
Class 7/31/02
----- -------
COMMON STOCK, $.001 PAR VALUE 4,371,350 SHARES
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CARECENTRIC, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2002 (unaudited) and December
31, 2001 (audited).
Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 2002 and 2001 (unaudited).
Consolidated Statements of Shareholders' Equity - Six Months Ended
June 30, 2002 (unaudited).
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002
and 2001 (unaudited).
Notes to Consolidated Financial Statements - June 30, 2002
(unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared by CareCentric, Inc. ("CareCentric" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of the Company, all adjustments (consisting only of normal recurring entries)
necessary for the fair presentation of the Company's results of operations,
financial position and cash flows for the periods presented have been included.
3
CARECENTRIC, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
(unaudited) (audited)
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 471,000 $ 201,000
Accounts receivable, net of allowance for doubtful
accounts of $1,343,000 and $1,042,000 respectively 6,112,000 4,185,000
Prepaid expenses and other current assets 530,000 608,000
Notes receivable 310,000 413,000
Total current assets 7,423,000 5,407,000
Purchased software, furniture and equipment, net 1,283,000 1,533,000
Intangible assets, net 4,873,000 5,437,000
Long term notes receivable 312,000 431,000
-------------- --------------
Total assets $ 13,891,000 $ 12,808,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 5,882,000 $ 5,572,000
Accounts payable 2,294,000 2,185,000
Accrued compensation expense 582,000 593,000
Accrued liabilities 6,460,000 6,574,000
Customer deposits 1,136,000 2,120,000
Unearned revenues 5,096,000 3,981,000
-------------- --------------
Total current liabilities 21,450,000 21,025,000
-------------- --------------
Accrued liabilities, less current portion 450,000 750,000
Note payable long-term 7,099,000 5,343,000
Commitments and contingencies
Shareholders' deficit
Preferred Stock: 10,000,000 shares authorized
Series B Preferred, $.001 par value;
5,600,000 issued and outstanding; liquidation value $1.31 6,000 6,000
Series C Preferred, $.001 par value;
850,000 issued and outstanding; liquidation value $1.00 1,000 1,000
Series D Preferred, $.001 par value;
398,000 issued and outstanding; liquidation value $3.07
Series E Preferred, $.001 par value;
210,000 issued and outstanding; liquidation value $1.02 -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
4,371,350 shares issued and outstanding at June 30, 2002
and December 31, 2001 4,000 4,000
Unearned compensation (169,000) (210,000)
Additional paid-in capital 21,280,000 21,280,000
Stock warrants 1,000,000 1,000,000
Accumulated deficit (37,230,000) (36,391,000)
Total shareholders' deficit (15,108,000) (14,310,000)
-------------- --------------
Total liabilities and shareholders' deficit $ 13,891,000 $ 12,808,000
============== ==============
See notes to consolidated financial statements
4
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $ 5,848,000 $ 5,657,000 $ 11,101,000 $ 11,385,000
Costs and expenses:
Cost of revenues 1,785,000 2,360,000 3,460,000 4,517,000
Selling, general and administrative 2,589,000 2,711,000 5,288,000 5,536,000
Research and development 942,000 1,609,000 1,889,000 3,376,000
Amortization and depreciation 423,000 950,000 848,000 1,901,000
Restructructuring Charge - 675,000 - 675,000
--------------- --------------- --------------- ---------------
Total costs and expenses 5,739,000 8,305,000 11,485,000 16,005,000
--------------- --------------- --------------- ---------------
Income (loss) from operations 109,000 (2,648,000) (384,000) (4,620,000)
Other income (expense):
Interest expense (153,000) (148,000) (322,000) (272,000)
Interest and other income 15,000 68,000 13,000 194,000
--------------- --------------- --------------- ---------------
Loss before taxes (29,000) (2,728,000) (693,000) (4,698,000)
--------------- --------------- --------------- ---------------
Income tax benefit (expense) - - - -
--------------- --------------- --------------- ---------------
Loss from continuing operations (29,000) (2,728,000) (693,000) (4,698,000)
--------------- --------------- --------------- ---------------
Discontinued operation
Loss from operations of
discontinued segment before taxes - (73,000) - (258,000)
--------------- --------------- --------------- ---------------
Net loss from discontinued operations - (73,000) - (258,000)
Net loss (29,000) (2,801,000) (693,000) (4,956,000)
=============== =============== =============== ===============
Cumulative Preferred Dividends 34,000 (178,000) (146,000) (354,000)
--------------- --------------- --------------- ---------------
Net Profit (loss) available to common
shareholders $ 5,000 $ (2,979,000) $ (839,000) $ (5,310,000)
=============== =============== =============== ===============
Net loss per share - basic and diluted
From continuing operations $ (0.01) $ (0.62) $ (0.16) $ (1.12)
Net loss per share - basic and diluted
From discontinued operations $ - $ (0.02) $ - $ (0.06)
--------------- --------------- --------------- ---------------
Net loss per share - basic and diluted
From operations $ (0.01) $ (0.63) $ (0.16) $ (1.19)
=============== =============== =============== ===============
Net loss per share - basic and diluted available
to common shareholders $ 0.00 $ (0.67) $ (0.19) $ (1.27)
=============== =============== =============== ===============
Weighted average common shares -
basic and diluted 4,371,000 4,418,000 4,371,000 4,178,000
=============== =============== =============== ===============
See notes to consolidated financial statements
5
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(unaudited)
ADDITIONAL TOTAL
COMMON PREFERRED UNEARNED PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES STOCK SHARES STOCK COMPENSATION CAPITAL WARRANTS DEFICIT DEFICIT
----------- --------- ---------- --------- ------------ ----------- ----------- ------------ -------------
Balance at
December 31, 2001 4,371,000 $ 4,000 7,058,000 $ 7,000 $(210,000) $21,280,000 1,000,000 (36,391,000) $(14,310,000)
----------- --------- ---------- --------- ------------ ------------ ----------- ------------ ------------
Amortization of
unearned
compensaton 41,000 41,000
Net loss (839,000) (839,000)
----------- --------- ---------- --------- ------------ ------------ ----------- ------------ -------------
Balance at
June 30, 2002 4,371,000 $ 4,000 7,058,000 $ 7,000 $(169,000) $21,280,000 1,000,000 (37,230,000) $(15,108,000)
========== ========== ========== ========= ============ ============ =========== ============= =============
See notes to Consolidated Financial Statements
6
CARECENTRIC, INC.
CONSOLOIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2002 2001 2002 2001
---------------- ----------------------------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 5,000 $ (2,979,000) $ (839,000) $ (5,310,000)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Provision for doubtful accounts 87,000 110,000 244,000 153,000
Amortization and depreciation 423,000 1,093,000 848,000 2,178,000
Stock based compensation charge to earnings 18,000 - 41,000 -
CHANGES IN ASSETS AND LIABILITIES, NET OF
ACQUISITIONS:
Accounts receivable (764,000) 1,296,000 (2,172,000) 376,000
Prepaid expenses and other current assets 60,000 159,000 80,000 (242,000)
Notes receivable 15,000 (139,000) 55,000 (139,000)
Accounts payable (338,000) 334,000 109,000 1,557,000
Accrued compensation 39,000 (196,000) (11,000) 201,000
Accrued liabilities (248,000) 100,000 (415,000) (12,000)
Customer deposits (1,010,000) (194,000) (984,000) (290,000)
Unearned revenues 989,000 (828,000) 1,115,000 (1,392,000)
---------------- ------------------ ---------------- ---------------
Net cash used in operating activities (724,000) (1,244,000) (1,929,000) (2,920,000)
---------------- ------------------ ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of software, furniture and equipment (13,000) (257,000) (34,000) (376,000)
---------------- ------------------ ---------------- ---------------
Net cash used in investing activities (13,000) (257,000) (34,000) (376,000)
---------------- ------------------ ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 756,000 1,279,000 1,756,000 2,979,000
Increase (decrease) in line of credit (85,000) - 310,000 -
Payments on capital lease obligation 9,000 13,000 - -
Proceeds from Consulting note receivable 71,000 - 167,000 -
---------------- ------------------ ---------------- ---------------
Net cash provided by financing 751,000 1,292,000 2,233,000 2,979,000
activities ---------------- ------------------ ---------------- ---------------
Net change in cash and cash equivalents 14,000 (209,000) 270,000 (317,000)
Cash and cash equivalents, beginning of period 457,000 254,000 201,000 362,000
---------------- ------------------ ---------------- ---------------
Cash and cash equivalents, end of period $ 471,000 $ 45,000 $ 471,000 $ 45,000
================ ================== ================ ===============
Cash paid during period for interest $ 74,000 $ 171,000 155,000 274,000
See notes to consolidated financial statements
7
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements prepared by the Company include the
results of operations of the parent company and its wholly owned subsidiaries.
All inter-company balances and transactions have been eliminated.
In the opinion of management, the financial statements include all material
adjustments necessary for the presentation of the Company's financial position,
results of operations and cash flow. The results of this period are not
necessarily indicative of the results for the entire year.
These financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or classification of
liabilities that might be necessary should the Company be unable to continue to
operate in the normal course of business. See Note 12 to the accompanying
Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform to the 2002
financial statement presentation.
DESCRIPTION OF BUSINESS
The Company is a provider of information technology systems and related
services and consulting services designed to enable home health care providers
to more effectively operate their businesses and compete in the prospective
payment system (PPS) and managed care environments. The Company's focus is to
help home health care providers streamline their operations and better serve
their patients. CareCentric offers several comprehensive software solutions.
Each of these software solutions is designed to enable customers to generate and
utilize comprehensive financial, operational and clinical information.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes revenue under SOP 97-2 as amended by SOP 98-9. The
Company recognizes software license revenue when the following criteria are met:
(1) a signed and executed contract is obtained; (2) delivery has occurred; (3)
the license fee is fixed and determinable; (4) collection is probable; and (5)
remaining obligations under the license agreement are immaterial. The Company
sells and invoices software licenses and maintenance fees as separate contract
elements, except with respect to first year maintenance which is sold in the
form of a bundled turnkey system. The Company has established vendor specific
objective evidence related to the value of maintenance fees. Where applicable,
the Company uses the residual value method to allocate software revenue between
licenses and first year maintenance.
Revenues are derived from the licensing and sub-licensing of software, the
sale of computer hardware, accessories and supplies, implementation and training
products and services, forms and case plans, and software maintenance and
support services. For the six months ended June 30, 2002, the Company recorded
total revenues of $11.1 million. The Company's core product lines of STAT2 and
10
MestaMed accounted for 36.3% and 52.8%, respectively, of the $11.1 million in
revenues.
To the extent that software and services revenues result from software
support, implementation, training and technical consulting services, such
revenues are recognized monthly as the related services are rendered or, for
software support revenues, over the term of the related agreement. To the extent
that software and services revenues result from software licenses, computer
hardware and third-party software revenues, such revenues are recognized when
the related products are delivered and collectability of fees is determined to
be probable, provided that no significant obligation remains under the contract.
Limited amounts of revenues derived from the sale of software licenses requiring
significant modification or customization are recorded based upon the percentage
of completion method using labor hours or contract milestones. Software support
or maintenance allows customers to receive unspecified enhancements and
regulatory data updates in addition to telephone support.
Third-party software and computer hardware revenues are recognized when the
related products are delivered. Software support agreements are generally
renewable for one-year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company generally charges for software implementation, training
and technical consulting services as well as management consulting services on
an hourly or daily basis. The Company offers "tiered pricing" for implementation
of new systems whereby the customer pays a fixed fee for a certain level of
packaged services and daily fees for services beyond the package.
Revenues for post-contract customer support are recognized ratably over the
term of the support period, which is typically one year. Post-contract customer
support fees typically cover incremental product enhancements, regulatory
updates and correction of software errors. Separate fees are charged for
significant product enhancements, new software modules, additional users, and
migrations to different operating system platforms.
Subsequent to delivery, the Company frequently delivers a variety of add-on
software and hardware components. Revenues from these sales are recognized upon
delivery.
In addition to software licenses, software maintenance and support, and
related hardware, the Company also provides a number of ancillary services
including on site implementation and training, classroom training, consulting
and "premium" and after-hours support. Revenues from such products and services
are recognized monthly as such products are delivered and such services are
performed.
PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment are carried at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
Those software and development expenses are accounted for as research and
development costs.
SOFTWARE DEVELOPMENT EXPENSES
Costs incurred to establish the technological feasibility of computer
software products are expensed as incurred. The Company's policy is to
capitalize costs incurred between the point of establishing technological
feasibility and general release only when such costs are material. For the six
months ended June 30, 2002 and the year ended December 31, 2001, the Company had
no capitalized computer software and development costs.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
10
INTANGIBLE ASSETS AND LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset's
carrying amount. The application of SFAS No. 121 resulted in an impairment loss
of $11.8 million recorded in the fourth quarter of 2001. See Note 5. Prior to
the impairment adjustment, the intangible assets arising from the
CareCentric/MCS merger on March 7, 2000 were amortized using the straight-line
method over the estimated useful lives of the related assets as more fully
disclosed in Notes 4 and 5. The measurement of the recorded impairment was based
upon comparing the projected undiscounted future cash flow from the use of the
assets against the unamortized carrying value of the assets in the financial
statements.
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations" and effective January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Intangible Assets" and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". These new standards superseded the
Company's previous accounting for intangible assets under SFAS No. 121 as
discussed below in the section Impact of New Accounting Standards.
In adopting SFAS No. 142, the Company ceased amortizing goodwill and
reassessed the remaining life for developed technologies from 6 years to 4
years. An impairment test is required to be performed upon the adoption of SFAS
No. 142 and at least annually thereafter. On an ongoing basis (absent any
impairment indicators requiring interim review), the Company expects to perform
impairment testing at the end of each fiscal year. Impairment adjustments
recognized from future impairment tests, if any, generally are required to be
recognized as operating expenses. In connection with adopting SFAS No. 142, the
Company also reassesses the useful lives and the classification of its
identifiable intangible assets to determine that they continue to be
appropriate.
SFAS No. 144, which became effective for fiscal years beginning after
December 15, 2001, provides a single accounting model for the disposal of
long-lived assets. New criteria must be met to classify the asset as an asset
held for sale. SFAS No. 144 also focuses on reporting the effect of a disposal.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial position or results of operations.
Actual results of operations for the three months and six months ended June
30, 2002 and the pro forma results of operations for the three months and six
months ended June 30, 2001, had the Company applied the provisions of SFAS No.
142 in that period, are as follows (the impact on amortization expense is the
result of a cessation of amortization of goodwill, the changed remaining life of
developed technologies and the effect of the impairment charge recorded in the
fourth quarter of the year ended December 31, 2001):
-------------------------------- -----------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- -----------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
NET INCOME (LOSS) AVAILABLE TO COMMON $ 5,000 $ (2,979,000) $ (839,000) $ (5,310,000)
SHAREHOLDERS
Add back: Goodwill amortization - 422,000 - 849,000
Add back: Technology amortization 249,000 333,000 498,000 666,000
---------------- --------------- ---------------- ----------------
Adjusted net income $ 254,000 $ (2,224,000) $ (341,000) $ (3,795,000)
================ =============== ================ ================
NET INCOME(LOSS) PER SHARE - BASIC AND
DILUTED
Reported net income $ 0.00 $ (0.67) $ (0.19) $ (1.27)
Goodwill amortization - 0.10 - 0.20
Technology amortization 0.06 0.08 0.11 0.16
---------------- --------------- ---------------- ----------------
Adjusted net income $ 0.06 $ (0.50) $ (0.08) $ (0.91)
================ =============== ================ ================
Weighted average common shares-
basic and diluted 4,371,000 4,418,000 4,371,000 4,178,000
================ =============== ================ ================
11
INCOME TAXES
The Company accounts for income taxes using the asset/liability method
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax bases of assets and liabilities. A
valuation allowance reducing the total net deferred tax asset to zero has been
recorded based on management's assessment that it is "more likely than not" that
this net asset is not realizable.
NET (LOSS) EARNINGS PER SHARE
The Company calculates earnings per share under SFAS No. 128, "Earnings Per
Share." Basic earnings per share exclude any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share for the three
months and six months ended June 30, 2002 and June 30, 2001 exclude the effects
of options, warrants and conversion rights as they would be anti-dilutive, and
as a result, basic and diluted earnings are the same for the periods.
STOCK BASED COMPENSATION
Employee stock options are accounted for under SFAS No. 123 (and its
related interpretations) which allows the use of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". See Note 8 to the
Consolidated Financial Statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair value.
Notes receivable and payable: The carrying amounts of the Company's notes
receivable and payable approximates their fair value.
SEGMENTS
The Company has one operating segment in continuing operations, which is
the Software Systems segment. As further described in Note 2, the Company
discontinued the Consulting segment during the year ended December 31, 2001.
NOTE 2 -- DISCONTINUED OPERATIONS
The discontinued operations reported in the Company's results of operations
for the three months and six months ending June 30, 2001 relate to the Company's
Simione Consulting segment, which was sold on September 28, 2001. The Consulting
business, prior to its sale, was the Company's only separately reported segment
of business. Accordingly, the Company no longer reports segment information. The
Consulting business segment was discontinued through a transaction pursuant to
which certain of the assets of the Company's wholly-owned subsidiary, Simione
Consulting, Inc., were sold to Simione Consultants, L.L.C. ("Simione"), which is
owned and controlled by William Simione, Jr., a director of the Company. The
total sales price was approximately $2.0 million plus the assumption of certain
liabilities by Simione. The Company's net pre-tax loss on the disposal was
approximately $2.6 million and resulted from a write-off of the intangible
assets associated with the Consulting segment as identified at the merger date
of March 7, 2000 with MCS.
12
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
Operating Revenue $ - $ 1,113 $ - $ 2,277
Income before Provision for Income Taxes
- (73) - (258)
Income from Discontinued Operations
Net of Income Tax $ - $ (73) $ - $ (258)
NOTE 3 - NOTES RECEIVABLE
The Company has certain Notes Receivable of varying maturities which have
resulted from the sale of the assets of the Consulting segment, and financing to
a customer for purchase of a new software system. The Consulting segment Note
Receivable is due from William Simione Jr., currently a director of the Company,
the President and Chief Executive Officer of the acquirer of the Consulting
business, Simione Consulting, LLC, and past Chief Executive Officer of the
Consulting segment when it was part of the Company. The Customer note occurred
in the normal course of business.
The amounts and term of each note are summarized in the table below:
NOTES RECEIVABLE
-------------------------------------------------------------
CONSULTING CUSTOMER NOTE TOTAL
----------------- ------------------ ------------------
Balance 12-31-01 $ 707,000 $ 137,000 $ 844,000
================= ================== ==================
Balance 6-30-2002 $ 540,000 $ 82,000 $ 622,000
================= ================== ==================
Interest Rate 8.50% 5.65%
NOTE 4 - PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment consisted of the following:
DEPRECIATION
JUNE 30, DECEMBER 31, ESTIMATED
2002 2001 USEFUL LIVES
---------------------- ---------------------- --------------------
Furniture and Fixtures $ 1,448,000 $ 1,428,000 10 years
Computer equipment and purchased software 6,251,000 6,237,000 5 years
---------------------- ----------------------
7,699,000 7,665,000
Accumulated depreciation (6,416,000) (6,132,000)
---------------------- ----------------------
$ 1,283,000 $ 1,533,000
====================== ======================
NOTE 5 - INTANGIBLE ASSETS
As a result of the merger with MCS on March 7, 2000, the Company
capitalized $26.5 million of intangible assets. Those assets were amortized
according to various lives ranging from five to nine years. In accordance with
SFAS No. 121, the Company was required to periodically review the value of its
intangible assets. During the fourth quarter of 2001, the Company's analysis and
13
review, utilizing the methodology of SFAS No. 121, resulted in an $11.8 million
impairment loss of the intangible assets of the Company. The major reasons for
the impairment were new technologies being integrated in the Company's current
and future products causing its existing product platforms to have reduced
future revenue generation capability, and an expectation that immediate
opportunities for new software sales are lower than were forecasted at the time
of the merger with MCS.
The following table summarizes the Company's changes in account balances
for its intangible assets since the MCS merger on March 7, 2000.
6/30/02
ORIGINAL ASSETS IMPARMENT ACCUMULATED NET BOOK AMORTIZATION
COST DISPOSED WTITE-DOWN AMORTIZATION VALUE PERIOD
--------------- --------------- ------------------- ------------------ ---------------------------
Developed technology $ 10,650,000 $ - $ (4,220,000) $ (2,939,000) $ 3,491,000 4 years
Customer base 1,700,000 (510,000) - (308,000) $ 882,000 9 years
Goodwill 14,151,000 (2,906,000) (7,580,000) (3,165,000) $ 500,000
--------------- --------------- ------------------- ------------------ --------------
$ 26,501,000 $ (3,416,000) $ (11,800,000) $ (6,412,000) $ 4,873,000
=============== =============== =================== ================== ==============
Included in Note 1 to the Financial Statements is a table presenting actual
results of operations for the three and six months ended June 30, 2002 and pro
forma results of operations for the three months and six months ended June 30,
2001. The pro forma results for June 30, 2001 present the effect on earnings had
the nonamortization provisions of SFAS No. 142 been applied and the effect of
the write-off of the intangibles recorded in the fourth quarter of 2001.
NOTE 6 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
As more fully discussed in Note 13, Subsequent Events, the notes payable
and related capitalized interest obligations to Mestek, Inc. and J. E. Reed were
restructured on July 1, 2002 pursuant to a plan approved by the Company's
shareholders at the June 6, 2002 annual shareholders' meeting. All amounts and
explanations of the
JUNE 30, 2002 DECEMBER 31, 2001
---------------------- -----------------------
SHORT TERM:
Line of Credit $ 5,882,000 $ 5,572,000
Note Payable - Mestek - -
---------------------- -----------------------
$ 5,882,000 $ 5,572,000
====================== =======================
LONG TERM:
Convertible Note Payable - J.E.Reed (1) $ 4,331,000 $ 3,500,000
Note Payable - Mestek 1,944,000 1,019,000
Convertible Note Payable - B.C.O'Donnell 600,000 600,000
Note Payable - J.E.Reed Capitalized interest 184,000 184,000
Note Payable - Mestek Capitalized Interest 40,000 40,000
---------------------- -----------------------
$ 7,099,000 $ 5,343,000
====================== =======================
(1) Includes Mestek's participation in the J.E.Reed Facility
Mestek and J. E. Reed notes payable included in this Note 6 are as they existed
as of June 30, 2002 prior to the closing of the recapitalization.
LINE OF CREDIT:
On July 12, 2000, the Company entered into a $6.0 million Loan and Security
Agreement facility with Wainwright Bank and Trust Company (the Wainwright
Facility), a commercial bank, under which the Company granted a first priority
14
position on substantially all of its assets as security. The Wainwright Facility
was used to pay off the line of credit with Silicon Valley Bank, certain
short-term loans from Mestek, Inc. (a related party, See Note 9), and a loan
from David O. Ellis. Borrowings under the Wainwright Facility accrue interest at
the bank's prime rate per annum and require monthly payments of interest. The
Wainwright facility currently matures on November 30, 2002. The Company has
submitted a request for, and expects approval by Wainwright, of a renewal of the
line of credit for one year beginning October 1, 2002 through September 30,
2003. The Company's obligations under the Wainwright Facility are guaranteed by
Mestek in consideration of which the Company has issued a warrant to Mestek to
purchase 104,712 shares of the Company's common stock as more fully explained in
Note 8 to these Financial Statements.
CONVERTIBLE NOTE PAYABLE - BARRETT C. O'DONNELL:
On November 11, 1999, Simione borrowed $500,000 from Barrett C. O'Donnell
and $250,000 from David O. Ellis, both on an unsecured basis, and executed
promissory notes in connection therewith. Dr. Ellis and Mr. O'Donnell are
directors of the Company. When the CareCentric/MCS merger was completed on March
7, 2000, the Company succeeded to both of these obligations. The note payable to
Dr. Ellis, which accrued interest at 9% per annum, was paid in full on July 12,
2000 in advance of its August 15, 2000 maturity. The note payable to Mr.
O'Donnell included interest at 9% per annum, was scheduled to mature on May 11,
2002, and required quarterly payments of accrued interest. On August 8, 2000,
the $500,000 note payable to Mr. O'Donnell, together with $100,000 of deferred
salary, was cancelled in exchange for a $600,000 subordinated note, convertible
into CareCentric common stock at a strike price of $2.51 per share, with
interest at 9% per annum and a five-year maturity. In January 2002, this loan
was amended to change the interest rate to prime plus two percent and to change
the terms of payment of interest for 2002 to require that one-half of the
accrued interest be timely paid each quarter and the balance to be paid on
December 31, 2003 or to be converted into an additional convertible note.
NOTE PAYABLE - MESTEK:
The Company is obligated under an eighteen month unsecured promissory note
in the principal amount of $1,019,000 payable to Mestek Inc. which bears
interest at prime plus one and one half percent (1.5%), with interest payable
semiannually and which matures on June 30, 2003. In addition to the $1,019,000
note, the Company is obligated under separate notes to Mestek in the amounts of
$40,000, $535,000 and $350,000. These additional notes payable bear interest at
prime plus two percent (2.0%) for the $40,000 note and prime plus one percent
(1.0%) for the $535,000 and $350,000 notes until all principal and accrued
interest amounts are paid in full. These funds were advanced by Mestek to
CareCentric to cover payroll and accounts payable obligations incurred by the
Company, working capital needs of the Company during the period of its
transition of senior lenders from Silicon Valley Bank to Wainwright Bank and
Trust Company, accrued and unpaid interest thereon and the unreimbursed portion
of Mr. Bruce Dewey's salary for the periods from November 9, 1999 to October 31,
2001 when he was Chief Executive Officer of the Company.
J.E. REED FACILITY:
On June 22, 2000, the Company entered into a financing facility (the J. E.
Reed Facility) provided by John E. Reed, Chairman of CareCentric and the
Chairman and Chief Executive Officer of Mestek, Inc. The J. E. Reed Facility
consists of a $6.0 million subordinated line of credit, convertible into common
stock of the Company at a strike price of $2.51 per share, with interest at 9%
per annum and a five-year maturity. The J. E. Reed Facility can be drawn down by
the Company as needed in $500,000 increments and is secured by a second position
on substantially all of the Company's assets. At June 30, 2002 and December 31,
2001, borrowings were equal to $4,331,000 and $3,500,000 respectively,
$1,000,000 of which was participated to Mestek at June 30, 2002 and at December
31, 2001. On December 31, 2001, the facility was amended to change the interest
rate to prime plus two percent (2.0%) and to change the payment term for unpaid
2001 interest to require payment on December 31, 2003, or convert the
outstanding unpaid interest to additional convertible notes, in the amount of
$184,438 at the option of Mr. Reed, and in the amount of $40,463 at the option
of Mestek, and to change the terms of payment of interest for 2002 to require
that one-half be timely paid each quarter and the balance be paid on December
31, 2003 or be converted to additional convertible notes.
The Company is obligated under a number of capital lease obligations
originally entered into by CareCentric related to computer equipment formerly
used in CareCentric's business.
15
The fair value of the Company's long-term debt is estimated based on the
current interest rates offered to the Company for debt offered under the
liquidity conditions and credit profile of the Company. Management believes the
carrying value of debt and the contractual values of the outstanding letters of
credit approximate their fair values as of June 30, 2002.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
The Company is engaged in various legal and regulatory proceedings arising
in the normal course of business which management believes will not have a
material adverse effect on its financial position or results of operations.
Simione Central Holding, Inc., a subsidiary of CareCentric now known as SC
Holding, Inc. ("SC Holding"), was one of several defendants named in a
"whistleblower" lawsuit related to alleged Medicare fraud filed under the False
Claims Act in the Northern District of Georgia (U.S. ex re. McLendon v.
Columbia/HCA Healthcare Corp., et al., No. 97-VC-0890 (N.D. Ga.)). The lawsuit
involves alleged claims that SC Holding allegedly participated in a conspiracy
with Columbia/HCA and other third parties to bill inflated and fraudulent claims
to Medicare. On July 21, 1999, the Justice Department issued notice that it had
elected not to join in the claims asserted against SC Holding by Donald
McLendon, who is a former employee of an unrelated service provider to
Columbia/HCA. Although the Justice Department joined the suit with regard to
other defendants, it specifically declined to intervene with regard to SC
Holding. In late 2000, CareCentric was advised by Mr. McLendon's attorney that
notwithstanding the declination by the Justice Department, Mr. McLendon intends
to pursue "whistleblower" claims against SC Holding directly. Through August 7,
2002, no such action has been taken and nothing further has been heard from
McLendon's attorney in over one year. Management believes that this claim has
been abandoned. In the event a claim is asserted, however, CareCentric and SC
Holding intend to vigorously defend against it.
In addition, the Company has subleased several offices that it no longer
uses; the Company remains contingently liable for the lease payments on these
subleased offices.
COMMITMENTS
The Company leases its office facilities and certain equipment under
various operating lease agreements. These leases require the Company to pay
taxes, insurance, and maintenance expenses and provide for renewal options at
the then fair market rental value of the property.
NOTE 8 - SHAREHOLDERS' EQUITY
As more fully discussed in Note 13, Subsequent Events, the Company's
Preferred Stock and Common Stock warrants were partially restructured on July 1,
2002 pursuant to a recapitalization plan approved by the Company's shareholders
at the June 6, 2002 annual shareholders' meeting. All amounts and explanations
of the Company's Preferred Stock and Common Stock warrants included in this Note
8 are as they existed at June 30, 2002 prior to the closing of the
recapitalization on July 1, 2002.
The Company's shareholders' equity (all on a split-adjusted basis) is
comprised of the following:
Common Shares - 20,000,000 shares authorized, $.001 par value, 4,371,350
shares issued and outstanding as of June 30, 2002 and December 31, 2001.
1,489,853 of such shares were issued on March 7, 2000 to the former MCS common
shareholders. 606,904 of such shares were issued on March 7, 2000 to the former
preferred shareholders and noteholders of CareCentric Solutions, Inc., which
shares were converted from Series A Preferred Stock into CareCentric (formerly
known as Simione Central Holdings, Inc.) common shares in connection with the
merger.
Pursuant to the terms of the July 12, 1999 merger agreement by which
Simione acquired the stock of CareCentric Solutions, Inc., the Company was
16
required to issue up to an additional 606,904 shares of common stock to the
former preferred shareholders and noteholders of CareCentric Solutions if the
average closing price of the Company's stock for the period October 1, 2000
through December 31, 2000 is not equal to or greater than $15.00 per share.
Since the Company's average closing stock price for the fourth quarter of 2000
was less than $15.00 per share, on March 19, 2001, the Company issued 593,688
shares of its common stock to the former preferred shareholders and noteholders
of CareCentric Solutions. As required by generally accepted accounting
principles, no value was assigned to these shares as it was deemed not to impact
total consideration paid. The Company asserted that it was not required to issue
13,216 additional shares of its common stock as well as 150,740 shares of common
stock that were being held by it in escrow under the terms of the CareCentric
Solutions Merger Agreement based upon various indemnification and expense
overages claims it believes it had against the former CareCentric Solutions
preferred shareholders and noteholders. On May 16, 2001, the Company finalized a
settlement of these claims with the representative of the former CareCentric
Solutions parties pursuant to which 88,586 shares of common stock were released
from escrow and distributed to the former CareCentric Solutions preferred
shareholders and noteholders, the remaining 62,154 escrow shares were cancelled,
no additional shares of common stock will be issued, and the parties executed a
comprehensive settlement agreement.
Pursuant to a comprehensive settlement agreement on June 28, 2001, between
Sterling Star, Inc., Mr. Ted Wade (President of Sterling Star, Inc.) and the
Company, certain disputes related to the acquisition of a product named Tropical
Software were settled. Under the terms of the settlement, 10,000 shares of
common stock originally issued to Sterling Star were returned to the Company and
were cancelled.
Preferred Stock-10,000,000 shares authorized
Series B Preferred Stock -$.001 par value, 5,600,000 shares issued. The
shares of Series B Preferred Stock are held by Mestek, Inc. (Mestek) and were
issued in consideration of $6,000,000 paid to CareCentric on March 7, 2000, in
the form of cash and debt forgiveness. The Series B Preferred shares, as
originally issued, carried 2,240,000 common share votes (on a split-adjusted
basis) and were entitled to a 9% annual cumulative dividend, among other rights.
In connection with the Company's application for listing on the Nasdaq SmallCap
Market, the Company reached an agreement with Mestek on June 12, 2000, under
which Mestek agreed to allow the aforementioned number of common share votes to
be reduced to 1,120,000 in consideration for the issuance by the Company to
Mestek of a warrant to acquire up to 490,396 shares of CareCentric common stock,
as more fully described below. On March 29, 2002, in connection with the
refinancing commitments made to the Company by Mestek and John E. Reed (as
further described in Note 13), Mestek transferred the voting rights associated
with the Series B Preferred Stock to Mr. Reed.
Series C Preferred Stock - $.001 par value, 850,000 shares issued. The
shares of Series C Preferred Stock are held by Mestek and result from the
conversion at the March 7, 2000 merger of a pre-existing $850,000 convertible
note payable to Mestek. The Series C Preferred shares carry 170,000 common share
votes (on a split adjusted basis) and are entitled to an 11% annual cumulative
dividend, among other rights. As more fully explained in Note 13, Subsequent
Events, in connection with the recapitalization plan approved by the
shareholders of the Company at the June 6, 2002 annual shareholders' meeting and
completed on July 1, 2002, the Series C Preferred Stock was terminated and all
accumulated Series C Preferred Stock dividends through termination date were
cancelled without payment. Accordingly, at June 30, 2002, $208,000 of
accumulated Series C Preferred Stock dividends were cancelled and are included
as an addition to earnings in the three months ended June 30, 2002.
Series D Preferred Stock - $.001 par value, 398,406 shares issued. The
shares of Series D Preferred Stock are held by John E. Reed and were issued on
June 12, 2000 in consideration of $1.0 million paid to the Company in cash. The
Series D Preferred shares have a 9% annual cumulative dividend, are convertible
into common stock at an initial conversion price of $2.51 per share, limit the
ability to issue dilutive stock options and have voting rights equal to those of
the common stock, among other rights.
Series E Preferred Stock - $.001 par value, 210,000 shares issued under a
restricted stock award. The shares of Series E Preferred Stock are held by John
R. Festa and the rights to those shares were granted on November 10, 2001. The
Series E Preferred shares are entitled to certain voting, dividend, liquidation
and conversion rights.
17
Common Stock Warrants - In connection with the issuance of the Series B
Preferred Stock described above, Mestek received a warrant to acquire up to
400,000 shares of the Company's common stock at a per share exercise price equal
to $10.875. In connection with the waiver by Mestek of certain voting rights
previously granted to it, Mestek received on June 12, 2000 a warrant to acquire
up to 490,396 shares of the Company's common stock for a term of 3 years at a
per share exercise price equal to $3.21. In connection with Mestek's guarantee
of the Company's obligations under the line of credit from Wainwright Bank and
Trust Company, as more fully explained in Note 6 to these Financial Statements,
Mestek received on July 12, 2000 a warrant to acquire up to 104,712 shares of
the Company's common stock for a term of 3 years at a per share exercise price
equal to $2.51. The aforementioned number of shares and per share prices is all
on a split-adjusted basis. Other warrants existing prior to the merger
transaction to acquire up to 25,000 shares of common stock remain outstanding.
The Company's outstanding Warrants as of June 30, 2002 are summarized in tabular
form as follows:
COMMON EXERCISE EXPIRATION
SHARES PRICE DATE
-------------------- ---------------------- -------------------------
490,396 $ 3.21 June 30, 2003
400,000 $ 10.88 March 7, 2003
104,712 $ 2.51 July 12, 2003
25,000 $ 5.00 February 24, 2005
--------------------
1,020,108
====================
The warrants issued to Mestek to purchase 490,396 and 400,000 shares of
Company common stock that were originally scheduled to expire on June 30, 2003
and March 7, 2003, respectively, were, as more fully explained in Note 13,
Subsequent Events, cancelled and reissued with an exercise price of $1.00 per
share and an expiration date of June 15, 2004, as part of the recapitalization
plan effective July 1, 2002.
Stock Options - Options totaling 1,000 shares were outstanding and vested
under the now discontinued 1997 SCHI NQ (Directors) Plan at an exercise price of
$60.00. Non-plan options totaling 107,453 shares, of which 90,787 are
exercisable, ere outstanding at exercise prices ranging from $2.51 to $45.00.
The Simione Central Holding Inc. 1997 Omnibus Equity-Based Plan (the "Plan") is
the only continuing stock option plan of the Company. The Plan offers both
incentive stock options and non-qualified stock options. The Company is
authorized to grant options of up to 900,000 shares of common stock. As of June
30, 2002, options totaling 498,423 shares were outstanding, of which 174,595
shares are exercisable, at exercise prices ranging from $2.51 to $73.55.
In connection with the Simione/MCS merger on March 7, 2000, Mestek was
granted a series of options to purchase a total of approximately 378,295 shares
of the Company's common stock (on a split-adjusted basis). These options are
exercisable only to the extent that outstanding CareCentric options, warrants or
other conversion rights are exercised. These options were designed to prevent
dilution of Mestek's ownership interest in the Company after the merger. As
options, warrants and other common rights are forfeited or cancelled, Mestek's
option rights are correspondingly reduced. Due to the contingent nature of these
options, they have been excluded from the above tables. At June 30, 2002,
159,573 shares of such options were available under the original terms of
issuance.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has subleased certain space to Healthfield, Inc. which is a
Mestamed customer and has a significant shareholder who was a former member of
the board of directors of the Company. The original lease and related sublease
expire on December 31, 2002 and required annual sublease payments equal to the
original lease payments of approximately $730,000.
During the year ended December 31, 2001, R. Bruce Dewey was Vice Chairman
of the Board of Directors, and president of the Company and Chief Operating
Officer of Mestek Inc. Mr. Dewey was replaced by Mr. John R. Festa as President
and Chief Executive Officer of the Company in October 2001 and did not stand for
re-election to the Board of Directors in 2002.
18
Winston R. Hindle, Jr., a director of the Company, is a director of Mestek.
Mestek has certain investments in the Company in the form of notes, convertible
notes, warrants, stock options and preferred stock as described in Notes 6, 8
and 13 to these Financial Statements.
The Company has a note receivable from Simione Consultants, LLC of $540,000
at June 30, 2002. On September 28, 2001, the Company discontinued its Consulting
business segment by closing the sale of certain of the assets of its
wholly-owned subsidiary, Simione Consulting, Inc. ("Consulting") to Simione
Consultants, LLC, which is owned and controlled by William J. Simione, Jr., a
director and former officer of CareCentric. The total sales price was
approximately $2.0 million plus the assumption of certain liabilities. The sale
was made pursuant to an asset purchase agreement. William Simione, Jr. has
resigned as an officer of, but remains a director of, CareCentric. The assets
sold under the agreement included the Consulting accounts receivable, computer
equipment, and miscellaneous prepaid expenses. Consideration received consisted
of approximately $1.0 million in cash and $1.0 million in notes, $770,000 with a
36-month term and $230,000 with a 5-month term. The cash proceeds were used to
pay down CareCentric's line of credit.
As of June 30, 2002, the Company had a promissory note outstanding to
Barrett C. O'Donnell, a director of the Company, as described in Note 6 to these
Financial Statements.
John E. Reed is a director and a significant, but not controlling,
shareholder of the Wainwright Bank and Trust Company which has provided the
Company with a $6.0 million line of credit, as more fully explained in Note 6 to
the Financial Statements.
John E. Reed, Chairman of the Company and Chairman and Chief Executive
Officer of Mestek, has provided the Company with a $6.0 million line of credit
(unrelated to the Wainwright Bank and Trust $6.0 million line of credit
described above) as more fully described in Note 6 to the Financial Statements
and has also purchased $1.0 million of the Company's Series D Preferred Stock on
June 12, 2000, as more fully described in Note 8 to these Financial Statements.
An independent committee of the Company's Board of Directors, consisting of
Barrett C. O'Donnell and David O. Ellis, negotiated the terms of Mr. Reed's debt
and equity investments in the Company. The issuance of 398,406 shares of Series
D Preferred Stock to Mr. Reed for his $1.0 million equity investment was based
on a per share price of $2.51, which was the 5-day average closing price of
CareCentric common stock as of the date of the final negotiation of the terms of
Mr. Reed's purchase. The conversion price for Mr. Reed's $6.0 million loan,
which converts into CareCentric common stock as described in more detail in Note
6 to these Financial Statements, is also $2.51 per share. On June 30, 2002, $5.3
million was outstanding under this credit facility, $4.3 million payable to Mr.
Reed, and $1.0 million payable to Mestek pursuant to a participation agreement.
As more fully described in Note 13, Subsequent Events, the interest payment
terms and conversion rights of Mr. Reed's loan to CareCentric were restructured
on July 1, 2002 in accordance with a recapitalization plan approved by the
shareholders of the Company.
Warrants were granted in June 2000 and July 2000 by the Company to Mestek
in connection with its waiver of certain voting rights previously granted to it
and in connection with its guarantee of the loan from Wainwright Bank and Trust
Company to the Company. The terms of the warrants (as described in more detail
in Note 8 to these Financial Statements) were based on negotiations by
independent committees of the Boards of Directors of the Company and Mestek. As
more fully described in Note 13, Subsequent Events, the exercise price of
Mestek's warrants were restructured on July 1, 2002 in accordance with a
recapitalization plan approved by the shareholders of the Company.
NOTE 10 - LICENSE AGREEMENTS
The Company licenses certain software products from third parties for
incorporation in, or other use with, its products and is obligated to pay
license fees in connection with such products. The Company sublicenses such
products to its customers and collects fees in connection with such
sublicensees.
NOTE 11 - EXECUTIVE COMPENSATION
The Company has entered into an employment agreement with its President and
Chief Executive Officer, Mr. John Festa. Among other specific contents, Mr.
Festa (i) has been granted 210,000 shares of Series E preferred stock, one half
19
of which vest evenly over the course of three years from his hire date dependent
upon his continued employment as President and CEO and one half of which are
forfeitable pro rata over a three year period if certain financial milestones
are not met, (ii) payment of an annual bonus of up to 50% of his annual salary
based on completion of annual performance objectives, (iii) the possibility of
receiving a special bonus which varies in dollar amount in the event there is a
sale of the Company while Mr. Festa is President and CEO and for nine months
thereafter. The Series E preferred stock was originally valued at approximately
$210,000 and is being amortized as compensation expense over the three-year
vesting period. The amount representing unearned compensation is recorded as an
increase in the stockholders deficit account. For the three and six months ended
June 30, 2002, approximately $18,000 and $41,000, respectively, was recorded as
current expense associated with earnings under this grant.
NOTE 12 - LIQUIDITY
As disclosed in the financial statements, the Company's operations used
significant amounts of cash in 2001. The Company has a working capital deficit
of $14.0 million at June 30, 2002. During the first six months of 2002, the
Company occasionally used its Wainwright Bank Credit Line and the Reed Credit
Line in order to meet its working capital needs.
As of July 31, 2002, the Company had untapped credit capacity of
approximately $0.6 million from the $6.0 million Wainwright Bank facility. As
discussed in Note 13, Subsequent Events, below, the J. E. Reed facility, after
including $445,000 of interest to be capitalized between July 1, 2002 and June
30, 2004, was fully utilized at July 31, 2002. The Company believes the
combination of the funds available from cash to be generated from future
operations and the Wainwright Bank facility will be sufficient to meet the
Company's operating requirements through at least June 30, 2003, assuming no
material adverse change in the operation of the Company's business.
Nevertheless, as revenues increase sufficiently to cover fluctuations in
forward-looking costs and operating expenses, the Company does not expect to,
but may need, the continued support of its majority shareholder to manage
short-term working capital fluctuations. The Company's majority shareholder has
stated he will consider and has the ability to continue to advance short term
working capital loans to the Company on terms similar to his existing credit
facility.
NOTE 13 - SUBSEQUENT EVENTS
On July 1, 2002, the Company closed the recapitalization plan initiated on
April 8, 2002. The recapitalization plan was approved by the common shareholders
of the Company at the June 6, 2002 annual stockholders' meeting. The following
is a summary of the material terms of the recapitalization plan on the Company's
debt and equity positions:
o Consolidation into a single $4.0 million note payable to Mestek of the
value of i) all notes, $1.944 million at June 30, 2002, and accrued
interest thereon payable to Mestek, plus ii) the $1.0 million
participation by Mestek in the J.E. Reed facility plus iii) the
$850,000 Series C Preferred Stock, after termination thereof,
(effective July 1, 2002, this $850,000 will be subtracted from
Shareholders Deficit and added to Long Term Notes Payable), plus iv)
payment by Mestek to CareCentric of $129,748 cash on July 1, 2002.
o Cancellation of the i) accumulated dividends on the Series C Preferred
Stock (the accumulated dividends at June 30, 2002 were $208,000 and
recorded as a reduction in preferred dividend expense and an increase
in net earnings for the three month period ended June 30, 2002 since
they were no longer a liability of the Company as of June 30, 2002)
ii) warrants, held by Mestek, to purchase 104,712 shares of
CareCentric common stock, and iii) options, held by Mestek, to
purchase 159,573 shares of CareCentric common stock.
o Consolidation of i) all notes, $4.331 million at June 30, 2002, and
accrued interest thereon payable to J. E. Reed, less ii) the $1.0
million participation by Mestek in the J. E. Reed facility, into a
$3.6 million note and a $0.103 million note.
o The new $4.0 million Mestek note and the $3.6 million and $0.103
million J. E. Reed notes will accumulate interest at a per annum rate
equal to six and one-quarter percent (6.25%) through June 30, 2004, at
which time the accumulated interest on each note will be capitalized
into the related note. After June 30, 2004, the principal and
capitalized interest of
20
the Mestek and J. E. Reed notes will accumulate interest at the per
annum rate equal to six and one-quarter percent (6.25%) with interest
compounded and payable quarterly. Together with any unpaid principal
and accrued interest, the Mestek and J. E. Reed notes will mature and
become payable on June 30, 2007.
o The new $4.0 million Mestek note and the $3.6 million J. E. Reed note,
together with the value of accrued interest may be converted at the
rate of $1.00 per share into CareCentric common stock exercisable at
any time after July 1, 2002. The new notes are subordinate to the
Wainwright Bank $6.0 million line of credit.
o Amendment of the terms of the Series B Preferred Stock (held by
Mestek) to provide that each share is convertible in 1.072 shares of
Common Stock.
o Amendment of the terms of the Series D Preferred Stock (held by J. E.
Reed) to provide that each share is convertible into 2.51 shares of
common stock
o Re-issuance of Mestek's warrants to purchase 400,000 shares and
490,396 shares, respectively, of common stock into new warrants to
purchase the same number of shares of common stock at an exercise
price of $1.00 per share and an expiration date of June 15, 2004.
On April 19, 2002, the Company received a letter from Nasdaq indicating
that certain financial indicators as reported in the Company's December 31, 2001
financial statements were below applicable minimum requirements issued by Nasdaq
to maintain listing on the Nasdaq SmallCap Market. The Company's current trading
price and its write-off of certain non-cash, impaired intangible assets
contributed to the Nasdaq letter. On May 10, 2002, the Company submitted a plan
to Nasdaq that might allow the Company to work towards meeting Nasdaq's
requirements for continued listing on the Nasdaq SmallCap Market. On June 24,
2002, the Company submitted a letter to Nasdaq summarizing the effect of the
capital restructuring approved by shareholders of the Company at the June 6,
2002 annual shareholders' meeting. In the event the Company's plan does not
receive acceptance, the Company's stock will be de-listed from Nasdaq.
Nevertheless, the Company is considering the actions necessary to achieve
continued trading on the OTC Bulletin Board.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
the Private Securities Litigation Reform Act of 1995, and are subject to the
safe harbor created by such sections. When used in this report, the words
"believe", "anticipate", "estimate", "expect", "plans", "intend", "likely",
"will" and similar expressions are intended to identify forward-looking
statements. The Company's future financial performance could differ
significantly from that set forth herein, and from the expectations of
management. Important factors that could cause the Company's financial
performance to differ materially from past results and from those expressed in
any forward looking statements include, without limitation, the inability to
obtain additional capital resources, variability in quarterly operating results,
customer concentration, product acceptance, long sales cycles, long and varying
delivery cycles, the Company's dependence on business partners, emerging
technological standards, changing regulatory standards, inability to retain or
hire experienced and knowledgeable employees, risks associated with
acquisitions, increased regulation of the health care industry, future
consolidation of the health care industry, potential liability in connection
with a Department of Labor investigation or IRS audit, the need to develop new
and enhanced products, product delays and errors, competition, difficulty
protecting intellectual property rights, and the risk factors detailed in the
Company's Registration Statement on Form S-4 (File No. 333-96529) and in the
Company's periodic reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. This Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto. The Company assumes no obligation to update publicly any such
forward-looking statements, whether as a result of new information, future
events, or otherwise.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of the Company's Consolidated Financial Statements. The
following is a brief discussion of the more significant accounting policies and
methods that we follow.
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. The most significant estimates and
assumptions relate to the intangible assets, realization of deferred income
taxes and the adequacy of allowances for returns and doubtful accounts. Actual
amounts could differ significantly from these estimates.
Our critical accounting policies are as follows:
o revenue recognition;
o estimate of allowance for uncollectible accounts; and
o valuation of long-lived and intangible assets and goodwill.
Revenue Recognition
The Company sells its software pursuant to non-exclusive license agreements
which provide for the payment of a one-time license fee. In accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
22
"Revenue Recognition", these revenues are recognized when products are delivered
and the collectability of fees is probable, provided that no significant
obligations remain under the contract. Revenues derived from the sale of
software products not requiring significant modification or customization are
recognized when products are delivered and collectability of fees is probable,
provided that no significant obligations remain under the contract. The price of
the Company's software varies depending on the number of software modules
licensed and the number of users accessing the system and can range from under
ten thousand dollars to a few million dollars. The Company generally requires
payment of a deposit upon the signing of a customer order as well as certain
additional payments prior to delivery. As a result, the Company's balance sheet
reflects significant customer deposits.
Third-party software and computer hardware revenues are recognized when the
related products are delivered. Software support agreements are generally
renewable for one-year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company generally charges for software implementation, training
and technical consulting services as well as management consulting services on
an hourly or daily basis. The Company offers "tiered pricing" for implementation
of new systems whereby the customer pays a fixed fee for a certain level of
packaged services and daily fees for services beyond the package.
Revenues for post-contract customer support are recognized ratably over the
term of the support period, which is typically one year. Post contract customer
support fees typically cover incremental product enhancements, regulatory
updates and correction of software errors. Separate fees are charged for
significant product enhancements, new software modules, additional users, and
migrations to different operating system platforms.
Estimate of Allowance for Uncollectible Accounts
The Company continuously reviews the status of all its accounts receivable
with its customers for current collectability. The Company recognizes that there
are circumstances under which customers will delay payment beyond the terms
offered by the Company either because of their own payment practices or
temporary situations which need to be resolved before the customer will continue
payment. Reserves for uncollectability are based on various ages of those
accounts receivable past their original due date for collection. The Company
does not write the account off against the reserve for uncollectible account
until all efforts to collect the accounts receivable have been exhausted.
Valuation of Long-Lived and Intangible Assets and Goodwill
The Company assesses the impairment of identifiable intangibles, long-lived
assets and related goodwill and enterprise level goodwill annually or whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could trigger an
impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of the Company's use of the acquired
assets or the strategy for its overall business; and
o significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles,
long-lived assets and related goodwill and enterprise level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the Company measures any impairment based on a projected discounted
cash flow method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model. After
recording a $11.8 million impairment adjustment, net intangible assets amounted
to $5.4 million as of December 31, 2001. See Note 5 of the Notes to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
23
Effect of Discontinued Operations and SFAS No. 142 on Management Discussion and
Analysis
To present a more meaningful analysis of operating performance, the
comparison of the three months and six months ended June 30, 2002 to June 30,
2001 compares the 2002 reported Financial Statements in the accompanying
Financial Statements to a pro forma 2001 statement of operating results. The pro
forma adjustments for the 2001 financial statements were to exclude the results
of the discontinued operations of the Consulting segment of CareCentric, Inc. in
September of 2001 (see Note 2 to the accompanying Financial Statements) and to
reduce amortization expense for the effect of adopting SFAS No. 142 (see Note 1
to the accompanying Financial Statements).
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2002
Net Revenues. Revenues (exclusive of the Consulting segment, which was
discontinued in September 2001) were $5.8 million for the three months ended
June 30, 2002 and $ 5.7 million for the three months ended June 30, 2001, or an
increase of 3.4%. The $0.1 million increase was mainly attributable to an
increase in software system sales and related income of $0.3 million to $3.2
million in 2002 from $2.9 million in 2001 offset by a decrease in maintenance
revenues of $0.2 million to $2.5 in 2002 from $2.7 million in 2001.
Cost of Revenues. Cost of revenues decreased $0.6 million, or 24.4%, to
$1.8 million in 2002 from $2.4 million for the three months ended June 30, 2001.
As a percentage of total net revenues, cost of revenues decreased to 30.5% in
2002 from 41.7% in 2001. The $0.7 million decrease resulted primarily from cost
cutting and changes in product mix. The decrease as a percentage of total net
revenues is due to the combined impact of many factors including improved
efficiencies in installation procedures and reduced support costs resulting from
lower sales discounts and changes in product mix.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $0.1 million, or 4.5%, to $2.6 million for the three months
ended June 30, 2002 from $2.7 million for the three months ended June 30, 2001.
As a percentage of total net revenues, selling, general and administrative
expenses were 44.3% for the three months ended June 30, 2002 and 47.9% for the
three months ended June 30, 2001. This decrease was attributable to synergies
derived from cost savings initiatives implemented in 2001 and 2002. Cost savings
were primarily realized through the centralization of administrative functions
and elimination of non-essential facilities and excess capacity.
Research and Development. Research and development expenses decreased
approximately $0.7 million, or 41.5%, to $0.9 million for the three months ended
June 30, 2002 from $1.6 million for the three months ended June 30, 2001. As a
percentage of total net revenues, research and development expenses decreased to
16.1% for the three months ended June 30, 2002 from 28.4% for the three months
ended June 30, 2001. The decrease in research and development expenditures was
primarily due to the Company's realignment of research efforts between existing
and future platform products. Although the comparative total expenditure on
research and development expenses has fallen in the second quarter of 2002, the
Company believes the 16.1% of revenue level experienced in the second quarter of
2002 is the proper amount to both enhance and maintain existing products and
begin development of new product platforms.
Amortization and Depreciation. Amortization and depreciation decreased by
approximately $0.5 million to $0.4 million for the three months ended June 30,
2002 from $0.9 million for the three months ended June 30, 2001. This decrease
is attributable to the net effect of the adoption of SFAS No. 142 and the
reduction in amortization from the write off of the intangibles in the fourth
quarter of 2001.
Operating income (Loss). The Company's net income from operations,
reflecting the same assumptions as above for purposes of comparability,
increased from a loss of $2.6 million for the three months ended June 30, 2001
to a net profit of $0.1 million for the three months ended June 30, 2002. This
decrease in loss from continuing operations is due to the combined effect of
stabilization and a modest increase in revenue, reductions in selling, general
and administrative, research and development and amortization expenses.
Other Income (Expense). Interest expense related to borrowings under the
Company's line of credit agreements and capital lease obligations remained
24
consistent for the three months ended June 30, 2002 compared to the three months
ended June 30, 2001. Interest and other income consist principally of interest
income related to customer finance charges and the Company's short term cash
investments and have decreased by approximately $53,000. The Company expects a
net increase in interest expense in 2002 caused by an increase in interest
bearing debt in 2002.
Income Taxes. The Company has not incurred or paid any substantial income
taxes since March 2000. At December 31, 2001, CareCentric had net operating loss
("NOL") carryforwards for federal and state income tax purposes of $36.7
million. Such losses expire beginning in 2010, if not utilized. The Tax Reform
Act of 1986, as amended, contains provisions that limit the NOL and tax credit
carryforwards available to be used in any given year when certain events occur,
including additional sales of equity securities and other changes in ownership.
As a result, certain of the NOL carryforwards may be limited as to their
utilization in any year. The Company has concluded that it is more likely than
not that these NOL carryforwards will not be realized based on a weighing of
available evidence at June 30, 2002, and accordingly, a 100% deferred tax
valuation allowance has been recorded against these assets.
Loss from Operations of Discontinued Segment. The loss of $73,000 for the
three months ended June 30, 2001 was attributable to the discontinued operations
of the Consulting segment.
Cumulative Preferred Dividends. Cumulative preferred dividends for the
three months ended June 30, 2002 were a contribution to profit of $34,000
compared to an increase to loss of $178,000 for the three months ended June 30,
2001. This contribution to profit was due to recognition of the earnings effect
of the recapitalization plan approved by the shareholders of the Company at the
June 6, 2002 annual shareholders' meeting and completed on July 1, 2002. Under
the provisions of the recapitalization plan, the Company's Series C Preferred
Stock was terminated and all accumulated Series C Preferred Stock dividends
through termination date were cancelled without payment. Accordingly, at June
30, 2002, $208,000 of accumulated Series C Preferred Stock dividends were
cancelled and are included as an addition to earnings in the three months ended
June 30, 2002.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
Net Revenues. Total net revenues for the six months ended June 30, 2002
decreased by $0.3 million, or 2.5%, to $11.1 million in 2002 from $11.4 million
in 2001. Revenues from software systems and related income remained unchanged at
$5.7 million. Revenues from software maintenance decreased by $0.3 million, or
4.6%, to $5.4 million in 2002 from $5.7 million in 2001.
Cost of Revenues. Total cost of revenues decreased approximately $1.1
million, or 23.4%, to $3.4 million for the six months ended June 30, 2002 from
$4.5 million for the six months ended June 30, 2001. As a percentage of total
revenues, cost of revenues decreased to 31.2% in 2002 from 39.7% in 2001. The
$1.1 million decrease resulted primarily from cost cutting and changes in
product mix. The decrease as a percentage of total net revenues is mainly the
result of efficiencies in installation and support costs, reduced sales
discounts and changes in product mix.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses decreased $0.2 million to $5.3 million for the six
months ended June 30, 2002 from $5.5 million for the six months ended June 30,
2001. This decrease is principally attributable to the net effect of synergies
derived from centralization of administrative functions and elimination of
non-essential facilities and excess capacity. As a percentage of total net
revenues, selling, general and administrative expenses were 47.6% for the six
months ended June 30, 2002 compared with 48.6% for the six months ended June 30,
2001.
Research and Development Expenses. Research and development expenses
decreased $1.5 million, or 44.1%, to $1.9 million for the six months ended June
30, 2002 from $3.4 million for the six months ended June 30, 2001. As a
percentage of total net revenues, these expenses decreased to 17.0% for the six
months ended June 30, 2002 from 29.7% for the six months ended June 30, 2001. As
the Company develops its next generation product platforms, research and
development expenditures are expected to increase to a higher level than
experienced in the first six months of 2002.
25
Amortization and Depreciation. Amortization and depreciation decreased by
$1.1 million to $0.8 million for the six months ended June 30, 2002 from $1.9
million for the six months ended June 30, 2001. This decrease is attributable to
the net effect of the adoption of SFAS No. 142 and the reduction in amortization
from the write off of the intangible assets in the fourth quarter of 2001.
Other Income (Expense). Interest expense related to borrowings under the
Company's line of credit agreements and capital lease obligations remained
unchanged for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001. Interest and other income, which consist principally of
interest income related to customer finance charges and the Company's short-term
cash investments, have decreased by approximately $0.2 million. The Company
expects a net increase in interest expense in 2002 caused by an increase in
interest bearing debt in 2002.
BACKLOG
The Company's backlog associated with its software operations remained
consistent at approximately $3.2 million on June 30, 2002 and December 31, 2001,
respectively. Backlog consists of the unrecognized portion of contractually
committed software license fees, hardware, estimated installation fees and
professional services. The length of time required to complete an implementation
depends on many factors outside the control of the Company, including the state
of the customer's existing information systems and the customer's ability to
commit the personnel and other resources necessary to complete the
implementation process. As a result, the Company may be unable to predict
accurately the amount of revenue it will recognize in any period and therefore
can make no assurances that the amounts in backlog will be recognized in the
next three months.
LIQUIDITY AND CAPITAL RESOURCES
In November 1999, CareCentric, prior to the merger with MCS and when its
pre-merger name was Simione Central Holdings, Inc. (Simione), received $1.6
million of loans from Mestek ($850,000) and two stockholders of Simione
($750,000), Barrett C. O'Donnell and David Ellis, to fund operating needs and
continue the execution of product strategies in the fourth quarter of 1999. The
$850,000 loan from Mestek was converted into 850,000 shares of newly issued
Series C Preferred stock of Simione at the closing of the MCS merger having
170,000 common shares votes and which are entitled to an 11.0% annual cumulative
dividend. The loan from Mr. O'Donnell along with $100,000 in deferred salary
were exchanged for a $600,000 subordinated note, convertible into common stock
at $2.51 per share, with interest at 9% per annum and a maturity date of August
8, 2005. In January 2002, this loan was amended to change the interest rate to
prime plus two percent and to change the terms of payment of interest for 2002
to require that one-half of the accrued interest be timely paid each quarter and
the balance to be paid on December 31, 2003 or to be converted into an
additional convertible note. The loan from Dr. Ellis was paid in full on July
12, 2000 from the credit facility provided by Wainwright Bank and Trust Company.
See Note 6 to the accompanying Consolidated Financial Statements.
In February 2000, Simione received an additional $1.0 million of loan
proceeds from Mestek. The loan proceeds were used to fund Simione's operating
needs until completion of the merger with MCS, and carried the same terms and
security as the $3.0 million loan received from Mestek in September 1999. On
March 7, 2000, the merger with MCS was completed and Mestek's notes evidencing
the $1.0 million and $3.0 million loans, together with an additional $2.0
million in cash from Mestek, were converted into Series B Preferred Stock and a
warrant to purchase CareCentric common stock. The consolidation of the accounts
receivable of MCS into the then outstanding balance of Simione's accounts
receivable provided an additional $1.5 million of borrowing capacity on the $5.0
million bank line of credit established by Simione in September 1999.
Immediately after the Simione/MCS merger on March 7, 2000, the Company had
cash and cash equivalents of $3.5 million and short and long term debt from all
sources of $2.5 million, for a positive net cash/(debt) position of
approximately $1.0 million. In order to supplement its capital resources, the
Company, subsequent to the merger, undertook a search for additional capital
resources, which resulted in the creation of the following credit and debt
facilities and preferred equity securities:
26
SOURCE FUNDING FORM DATE CLOSED
------------------------------------- ----------------- ------------------------- ----------------
John E. Reed $ 1,000,000 Series D Preferred Stock June 22, 2000
John E. Reed 6,000,000 Line of Credit June 22, 2000
Wainwright Bank and Trust Company 6,000,000 Line of Credit July 12, 2000
-----------------
$13,000,000
=================
These three transactions are described in greater detail in Note 6 to the
accompanying Consolidated Financial Statements. The Wainwright Bank and Trust
Company line of credit was used to pay off the line of credit from Silicon
Valley Bank (the Company's commercial bank prior to the merger with MCS),
certain short-term loans from Mestek, and the note payable to David O. Ellis.
The Wainwright Line of Credit expired July 11, 2002 and has been extended
through November 30, 2002. The Company has submitted a request for, and expects
approval by Wainwright, of a renewal of the line of credit for one year
beginning October 1, 2002 through September 30, 2003. Payment of the Wainwright
Line of Credit is guaranteed by Mestek. As of July 31, 2002, the Company owes
Wainwright approximately $5,425,000 under the Line of Credit.
The Company is obligated under an 18 month unsecured promissory note in the
principal amount of $1,019,000 payable to Mestek which bears interest at prime
plus one and one half percent (1.5%), with interest payable semiannually and
which matures on June 30, 2003. This note covers funds advanced by Mestek to
CareCentric to cover payroll and accounts payable obligations incurred by the
Company during the period of its transition of senior lenders from Silicon
Valley Bank to Wainwright Bank and Trust Company, accrued and unpaid interest
thereon and the unreimbursed portion of Mr. R. Bruce Dewey's salary for the
periods from November 9, 1999 to October 31, 2001.
On June 22, 2000, the Company closed a financing with John E. Reed, a
CareCentric director and the chief executive officer of Mestek, of up to $7
million. The financing consisted of $1 million in equity, and a $6 million
subordinated revolving line of credit facility, convertible into common stock of
CareCentric, with a 9% interest rate and five-year maturity. On December 31,
2001, the outstanding amount under the Credit Facility was $3.5 million, $1.0
million of which was participated to Mestek, and the balance of which was
retained by Mr. Reed. On December 31, 2001, the facility was amended to change
the interest rate to prime plus two percent, to change the payment terms for
unpaid 2001 interest to require payment at December 31, 2003 or to convert the
outstanding unpaid interest to additional convertible notes in the amount of
$184,438 at the option of Mr. Reed, and in the amount of $40,463 at the option
of Mestek, and to change the terms of payment of interest for 2002 to require
that one-half be timely paid each quarter and the balance to be paid on December
31, 2003 or to be converted to additional convertible notes.
On April 8, 2002, the Company secured two commitments for additional
financing, from existing shareholders John Reed and Mestek. Mr. Reed and Mestek
provided $871,117 and $1,092,000 in short-term debt financing, respectively.
These additional loans were consolidated and restructured on July 1, 2002 in
accordance a capital restructuring plan approved by the Company's shareholders.
See Notes 6, 8 and 13 to the Financial Statements.
During 2000, 2001 and the first quarter of 2002, the Company incurred
operating losses resulting from numerous factors, including the uncertain
operating condition of its customers due to the negative effects of the current
government limits over home medical cost reimbursement, higher than anticipated
costs of developing, implementing and supporting The Smart Clipboard(R) product
and slower than expected completion of effective integration of the MCS and
Simione Central organizations. In addition, sales revenue in 2000 was lower than
planned in the core MestaMed(R), DME VI and STAT2 products while new sales of
The Smart Clipboard(R) and Tropical products (now discontinued) did not develop
as quickly as projected.
The second quarter of 2002 is the first quarter of results with a
completely re-engineered organization following the merger with Simione Central.
Also, during the second quarter of 2002, the Company recorded a sustained
27
increase in bookings of new systems in several of its major product lines and
newly integrated third party software modules. The existing pipeline, if
realized, will exceed the Company's 2002 bookings budget and generate cash flow
for the rest of 2002 in excess of its operating needs. The Company projects
funding requirements for product development initiatives will use all of these
excess operating funds.
As of July 31, 2002, the Company had untapped credit capacity of
approximately $0.6 million from the $6.0 million Wainwright Bank facility. As
discussed in Note 13, Subsequent Events, above, the J. E. Reed facility, after
including $445,000 of interest to be capitalized between July 1, 2002 and June
30, 2004, was fully utilized at July 31, 2002. The Company believes the
combination of the funds available from cash to be generated from future
operations and the Wainwright Bank facility will be sufficient to meet the
Company's operating requirements through at least June 30, 2003, assuming no
material adverse change in the operation of the Company's business.
Nevertheless, until revenues increase sufficiently to cover fluctuations in
forward-looking costs and operating expenses, the Company may need the continued
support of its majority shareholder to manage short-term working capital
fluctuations. The Company's majority shareholder has stated he will consider and
has the ability to continue to advance short term working capital loans to the
Company on terms similar to his existing credit facility. See also Note 12 to
Financial Statements.
The table below summarizes the Company's debt and other contractual
obligations at June 30, 2002:
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4 - 5 YEARS
Long-Term Debt $ 7,099,000 $ 0 $ 2,168,000 $ 4,931,000
Capital Lease Obligations 17,000 17,000 - -
Operating Leases 4,562,000 2,359,000 2,114,000 89,000
Line of Credit 5,882,000 5,882,000 - -
Other Long-Term Obligations 1,152,000 702,000 450,000 -
----------------- -------------------- ------------------ -----------------
Total Contractual Cash
Obligations $ 18,712,000 $ 8,960,000 $ 4,732,000 $ 5,020,000
================= ==================== ================== =================
As of June 30, 2002, the Company had negative working capital of $14.0
million and cash equivalents of $0.5 million. The Company's current liabilities
as of June 30, 2002 include customer deposits of $1.1 million and unearned
revenues of $5.1 million.
Net cash used in operating activities for the six months ended June 30,
2002 and June 30, 2001 was $1.9 million and $2.9 million, respectively. Net cash
used in operating activities for the three months ended June 30, 2002 and June
30, 2001 was $0.7 million and $1.2 million, respectively.
Cash flows from financing activities during the six months ended June 30,
2002 include the Wainwright and Reed lines of credit borrowings.
Inflation has not had, and is not expected to have, a material impact on
the Company's operations. If inflation increases, the Company will attempt to
increase its prices to offset increased expenses. No assurance can be given,
however, that the Company will be able to adequately increase its prices in
response to inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 141 addresses financial accounting and reporting for all business
combinations and requires that all business combinations entered into subsequent
to June 2001 be recorded under the purchase method. This statement also
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 142 addresses
28
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets at acquisition. This statement also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. These statements were adopted by the Company on
January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized. In the
place of amortization, the Company is required to periodically review the
valuation of the Company's intangible assets using a discounted cash flow
estimation approach. Following the accounting for impairment discussed
immediately below, which has been made under the rules of SFAS No. 121, the
effect of adopting SFAS No. 141 and 142 was limited to changes in amortization
expense for the periods after December 31, 2001. Additionally, the assembled
workforce intangible asset has been recharacterized as goodwill, which will no
longer be amortized under the rules of SFAS No. 142.
Accounting for impairment. For the years ended December 31, 2001, 2000 and
1999, the Company reported its accounting for intangible assets under SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30. Under the rules of SFAS No. 121, the Company performs periodic
analysis to determine if the Company's intangible assets have been impaired
using a combination of discounted and undiscounted estimated cash flow
estimations. In the fourth quarter of 2001, the Company determined that the
combination of new technologies being integrated in the Company's current and
future products would result in its existing product platforms having smaller
future revenue generation capability. Additionally, the Company determined that
the continued support of existing products while migrating to new technology
platforms would result in a lower estimated cash value to the Company of
existing products. The resulting impairment to the intangible assets of the
Company was $11.8 million. As further detailed in Note 5 of the Financial
Statements, the intangible assets of the Company, after the impairment charge,
will be Developed Technologies, Customer Base and Assembled Workforce.
On October 3, 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that replaced SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of." The primary objectives of this project were to develop one
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sales and to address significant
implementation issues. The accounting model for long-lived assets to be disposed
of by sale applies to all long-lived assets, including discontinued operations,
and replaces the provisions of the Accounting Principles Board (APB Opinion No.
30, Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business) for the disposal of segments of a business. SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to determine whether such assets should be
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. The provisions
of SFAS No. 144 were adopted by the Company effective January 1, 2002. The
impact of those provisions were not material to the Company's statement of
financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds FASB Statement
No. 44, Accounting for Intangible Assets of Motor Carriers and amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
does not believe SFAS No. 145 will have a material effect on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal. SFAS No. 146 eliminates the definition and requirements
for recognition of exit costs in EITF Issue No. 94-3. SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe SFAS No. 146
will have a material effect on its financial statements.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of June 30, 2002, the Company's obligations include variable rate notes
payable and a line of credit bank note with aggregate principal balances of
approximately $13.0 million, which mature at various dates through 2005. The
Company is exposed to the market risk of significant increases in future
interest rates. Each incremental point change in the prime interest rate would
correspondingly increase or decrease the Company's interest expense by
approximately $115,000 per year.
At June 30, 2002, the Company had accounts receivable of approximately $6.1
million net of an allowance for doubtful accounts of $1.2 million. The Company
is subject to a concentration of credit risk because most of the accounts
receivable are due from companies in the home health industry.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither CareCentric nor any of its subsidiaries is currently a party to any
legal proceedings which would be material to the business or financial condition
of the Company on a consolidated basis.
Simione Central Holding, Inc., a subsidiary of CareCentric now known as SC
Holding, Inc. ("SC Holding") was one of several defendants named in a
"whistleblower" lawsuit related to alleged Medicare fraud filed under the False
Claims Act in the Northern District of Georgia (U.S. ex re. McLendon v.
Columbia/HCA Healthcare Corp., et al., No. 97-VC-0890 (N.D. Ga.)). The lawsuit
involves alleged claims that SC Holding allegedly participated in a conspiracy
with Columbia/HCA and other third parties to bill inflated and fraudulent claims
to Medicare. On July 21, 1999, the Justice Department issued notice that it had
elected not to join in the claims asserted against SC Holding by Donald
McLendon, who is a former employee of an unrelated service provider to
Columbia/HCA. Although the Justice Department joined the suit with regard to
other defendants, it specifically declined to intervene with regard to SC
Holding. In late 2000, CareCentric was advised by Mr. McLendon's attorney that
notwithstanding the declination by the Justice Department, Mr. McLendon intends
to pursue "whistleblower" claims against SC Holding directly. Through August 7,
2002, no such action has been taken and nothing further has been heard from
McLendon's attorney for over one year. Management believes that this claim has
been abandoned. In the event a claim is asserted, however, CareCentric and SC
Holding intend to vigorously defend against it.
Item 2. Change in Securities.
On April 19, 2002, the Company received a letter from Nasdaq indicating
that certain financial indicators as reported in the Company's December 31, 2001
financial statements were below applicable minimum requirements issued by Nasdaq
to maintain listing on the Nasdaq SmallCap Market. The Company's current trading
price and its write-off of certain non-cash, impaired intangible assets
contributed to the Nasdaq letter. On May 10, 2002, the Company submitted a plan
to Nasdaq that might allow the Company to work towards meeting Nasdaq's
requirements for continued listing on the Nasdaq SmallCap Market. On June 24,
2002, the Company submitted a letter to Nasdaq summarizing the effect of the
capital restructuring approved by shareholders of the Company at the June 6,
2002 annual shareholders' meeting. In the event the Company's plan does not
receive acceptance, the Company's stock will be de-listed from Nasdaq.
Nevertheless, the Company is considering the actions necessary to achieve
continued trading on the OTC Bulletin Board.
At the Annual Meeting of Stockholders on June 6, 2002, the stockholders of
the Company voted to amend the Company's Certificate of Incorporation to provide
that:
o the 5,600,000 shares of Series B Preferred Stock held by Mestek, Inc.
will be convertible into shares of CareCentric common stock at an
exchange rate of approximately 1.072 shares of common stock per share
of Series B Preferred Stock, for a total of 6,000,000 shares of common
stock.
o the 398,406 shares of Series D Preferred Stock held by John Reed will
be convertible into shares of CareCentric common stock at an exchange
rate of 2.51 shares of common stock per share of Series D Preferred
Stock, for a total of 1,000,000 shares of common stock.
30
The amendments were proposed as part of a refinancing plan for the Company.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 6, 2002, the Annual Meeting of Stockholders of CareCentric, Inc. was
held. Stockholders present in person or by proxy holding 5,034,700 votes, based
upon ownership of CareCentric common stock and preferred stock, were represented
at the meeting.
Eight Directors of the Company were duly elected to hold office until the next
Annual Meeting of Stockholders or until successors have been duly elected. The
elected Directors and the affirmative votes were as follows:
VOTES AGAINST OR
NAME AFFIRMATIVE VOTES WITHHELD
---- ----------------- --------
Dr. David O. Ellis 5,023,479 11,148
John R. Festa 5,024,106 10,521
Barrett C. O'Donnell 5,022,891 11,736
Winston R. Hindle, Jr. 5,023,466 11,161
John E. Reed 5,023,352 11,275
Stewart B. Reed 5,023,305 11,322
William Simione, Jr. 5,023,091 11,536
Edward K. Wissing 5,023,479 11,148
The Company's financing plan, including an amendment to the Company's
certificate of incorporation, was approved. The affirmative votes for this
matter were as follows:
AFFIRMATIVE VOTES VOTES AGAINST VOTES ABSTAINED
----------------- ------------- ---------------
3,589,407 10,317 27,404
Grant Thornton LLP was appointed as the Company's auditors for December 31,
2002. The affirmative votes for this matter were as follows:
AFFIRMATIVE VOTES VOTES AGAINST VOTES ABSTAINED
----------------- ------------- ---------------
5,026,171 5,796 2,733
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of
the Company (Incorporated by reference to Exhibit 3.4
of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002 (File No. 000-22162)).
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3.2 Certificate of Ownership and Merger of Simione Central
Holdings, Inc. with and into CareCentric Inc.
(Incorporated by reference to Exhibit 3.2 of the
Company's Current Report on Form 8-K dated as of
January 31, 2001 (file No. 000-22162)).
3.3 Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.3 of the
Company's Registration Statement on Form S-1
(Registration Number 333-25551) as filed with the
Securities and Exchange Commission).
3.4 Certificate of Designations, Preferences and Rights of
Series E Preferred Stock of the Company (Incorporated
by reference to Exhibit 3.4 of the Company's Annual
Report on Form 10-K for the year ended December 31,
2001 (File No. 000-22162)).
3.5* Certificate of Amendment of Certificate of
Designations, Preferences and Rights of Series B
Preferred Stock of the Company.
3.6* Certificate of Amendment of Certificate of
Designations, Preferences and Rights of Series D
Preferred Stock of the Company.
10.47* Promissory Note in the original principal amount of
$4,000,000 dated as of July 1, 2002 from the Company
and certain of its subsidiaries in favor of Mestek,
Inc.
10.48* Secured Convertible Credit Facility and Security
Agreement dated as of July 1, 2002 by and between the
Company, SC Holding, Inc., CareCentric National, LLC
and Mestek, Inc.
10.49* Promissory Note in the original principal amount of
$3,555,555 dated as of July 1, 2002 from the Company
and certain of its subsidiaries in favor of John E.
Reed.
10.50* Amended and Restated Secured Convertible Credit
Facility and Security Agreement dated as of July 1,
2002 by and between the Company, SC Holding, Inc.,
CareCentric National, LLC and John E. Reed.
10.51* Warrant for 400,000 shares of common stock dated as
of July 1, 2002 by and between the Company and Mestek,
Inc.
10.52* Warrant Exchange Agreement with respect to 400,000
shares of common stock dated as of July 1, 2002 by and
between the Company and Mestek, Inc.
10.53* Warrant for 490,396 shares of common stock dated as
of July 1, 2002 by and between the Company and Mestek,
Inc.
10.54* Warrant Exchange Agreement with respect to 490,396
shares of common stock dated as of July 1, 2002 by and
between the Company and Mestek, Inc.
10.55* Registration Rights Agreement dated as of July 1,
2002 by and between the Company and Mestek, Inc.
10.56* Promissory Note in the original principal amount of
$103,818 dated as of July 1, 2002 from the Company and
certain of its subsidiaries in favor of John E. Reed.
99.1* Certification of Periodic Financial Reports.
------------------------
* Filed herewith.
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(b) Reports on Form 8-K:
On April 30, 2002, the Company filed a Form 8-K regarding a
letter from Nasdaq indicating that certain financial
indicators as reported in the December 31, 2001 financial
statements were below applicable minimum requirements issued
by Nasdaq to maintain listing on the Nasdaq SmallCap Market.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARECENTRIC, INC.
Dated: August 14, 2002 By: /s/ George M. Hare
--------------------------------
GEORGE M. HARE
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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