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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 MARCH 31, 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 4/30/2002
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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 - March 31, 2002 (unaudited) and
December 31, 2001 (audited).
Consolidated Statements of Operations - Three Months Ended March
31, 2002 and 2001 (unaudited).
Consolidated Statements of Shareholders' Equity - Three Months
Ended March 31, 2002 (unaudited).
Consolidated Statements of Cash Flows - Three Months Ended March
31, 2002 and 2001 (unaudited).
Notes to Consolidated Financial Statements - March 31, 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
MARCH 31, DECEMBER 31,
2002 2001
----------- ---------
(unaudited)
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 457,000 $ 201,000
Accounts receivable, net of allowance for doubtful
accounts of $1,234,000 and $1,042,000
respectively 5,434,000 4,185,000
Prepaid expenses and other current assets 589,000 608,000
Notes receivable 327,000 413,000
----------- ---------
Total current assets 6,807,000 5,407,000
Purchased software, furniture and equipment, net 1,410,000 1,533,000
Intangible assets, net 5,155,000 5,437,000
Long term notes receivable 383,000 431,000
----------- -----------
Total assets $13,755,000 $12,808,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 5,967,000 $ 5,572,000
Accounts payable 2,632,000 2,185,000
Accrued compensation expense 543,000 593,000
Accrued liabilities 6,548,000 6,574,000
Customer deposits 2,146,000 2,120,000
Unearned revenues 4,107,000 3,981,000
----------- -----------
Total current liabilities $21,943,000 $21,025,000
=========== ===========
Accrued liabilities, less current portion 600,000 750,000
Note payable long-term 6,343,000 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 $1.27 6,000 6,000
Series C Preferred, $.001 par value;
850,000 issued and outstanding; liquidation
value $1.23 1,000 1,000
Series D Preferred, $.001 par value;
398,000 issued and outstanding; liquidation
value $2.92 - -
Series E Preferred, $.001 par value;
210,000 issued and outstanding; liquidating
Value $1.01 - -
Common stock, $.001 par value; 20,000,000 shares
authorized; 4,371,350 shares issued and outstanding
at March 31, 2002 and December 31, 2001 4,000 4,000
Unearned compensation (187,000) (210,000)
Additional paid-in capital 21,280,000 21,280,000
Stock warrants 1,000,000 1,000,000
Accumulated deficit (37,235,000) (36,391,000)
------------ ------------
Total shareholders' deficit (15,131,000) (14,310,000)
------------ ------------
Total liabilities and shareholders' deficit $ 13,755,000 12,808,000
============ ============
See notes to consolidated financial statements
4
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2002 2001
----------------- -----------------
(unaudited) (unaudited)
Net revenues $ 5,253,000 $ 5,728,000
Costs and expenses:
Cost of revenues 1,676,000 2,157,000
Selling, general and administrative 2,699,000 2,825,000
Research and development 947,000 1,767,000
Amortization and depreciation 425,000 951,000
----------------- -----------------
Total costs and expenses 5,747,000 7,700,000
----------------- -----------------
Loss from operations (494,000) (1,972,000)
Other income (expense):
Interest expense (168,000) (124,000)
Interest and other income (2,000) 126,000
----------------- -----------------
Loss before taxes (664,000) (1,970,000)
----------------- -----------------
Income tax benefit (expense) - -
----------------- -----------------
Loss from continuing operations (664,000) (1,970,000)
----------------- -----------------
Discontinued operation
Loss from operations of
discontinued segment before taxes - (185,000)
Applicable tax expense - -
----------------- -----------------
Net loss from discontinued operations - (185,000)
Net loss (664,000) (2,155,000)
================= =================
Cumulative Preferred Dividends (180,000) (176,000)
----------------- -----------------
Net loss available to common shareholders $ (844,000) $ (2,331,000)
================= =================
Net loss per share - basic and diluted
From continuing operations $ (0.15) $ (0.50)
Net loss per share - basic and diluted
From discontinued operations $ - $ (0.05)
----------------- -----------------
Net loss per share - basic and diluted $ (0.15) $ (0.55)
From operations
================= =================
Net loss per share - basic and diluted available $ (0.19) $ (0.59)
to common shareholders
================= =================
Weighted average common shares -
basic and diluted 4,371,000 3,922,000
================= =================
See notes to consolidated financial statements
5
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 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
compensation 23,000 23,000
Net loss (844,000) (844,000)
--------- ------ --------- ------- ---------- ---------- --------- ------------ =============
Balance at
March 31, 2001 4,371,000 $4,000 7,058,000 $7,000 $(187,000) $21,280,000 $1,000,000 $(37,235,000) $(15,131,000)
========= ====== ========= ======== ========== ============ ========== ============== =============
See notes to Consolidated Financial Statements
6
CARECENTRIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
2002 2001
---------------------- ----------------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (844,000) $ (2,331,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Provision for doubtful accounts 157,000 43,000
Amortization and depreciation 425,000 1,085,000
Stock base compensation charge to earnings 23,000 -
CHANGES IN ASSETS AND LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable (1,406,000) (920,000)
Prepaid expenses and other current assets 19,000 (401,000)
Notes receivable 37,000 -
Accounts payable 447,000 1,223,000
Accrued compensation (50,000) 397,000
Accrued liabilities (167,000) (112,000)
Customer deposits 26,000 (96,000)
Unearned revenues 126,000 (564,000)
---------------------- ----------------------
Net cash used in operating activities (1,207,000) (1,676,000)
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of software, furniture and equipment (19,000) (119,000)
---------------------- ----------------------
Net cash used by in investing activities (19,000) (119,000)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,000,000 1,700,000
Increase (decrease) in line of credit 395,000 -
Payments on capital lease obligation (9,000) (13,000)
Proceeds from Consulting note receivable 96,000 -
---------------------- ----------------------
Net cash provided by financing activities 1,482,000 1,687,000
---------------------- ----------------------
Net change in cash and cash equivalents 256,000 (108,000)
Cash and cash equivalents, beginning of period 201,000 362,000
---------------------- ----------------------
Cash and cash equivalents, end of period $ 457,000 $ 254,000
====================== ======================
SUPPLEMENTAL DISCLOSURE:
Cash paid during period for interest $ 81,000 $ 103,000
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 Companies 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 quarter ended March 31, 2002, the Company recorded
total revenues of $5.2 million. The Company's core product lines of STAT2 and
MestaMed accounted for 34.9% and 54.1% respectively of the $5.2 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
8
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 computer-based training, CD-ROMs and
a number of ancillary services including on site implementation and training,
classroom training, consulting and "premium" and after-hours support. Revenues
from such products and services are recognized monthly as such products are
delivered and such services are performed.
PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment are carried at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
SOFTWARE DEVELOPMENT EXPENSES
Costs incurred to establish the technological feasibility of computer
software products are expensed as incurred. The Company's policy is to
capitalize costs incurred between the point of establishing technological
feasibility and general release only when such costs are material. For the
quarter ended March 31, 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.
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 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 SFAS No. 142, "Goodwill and Intangible Assets" in 2001 became
effective January 1, 2002 and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," became effective January 1, 2002. These new
standards superseded the Company's previous accounting for Intangible Assets
under SFAS No. 121 as discussed below in the section Recent Accounting
9
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pronouncements. In adopting SFAS No. 142, the Company ceased amortizing goodwill
and reassessed the life going forward for developed technologies from the
remaining 6 years to 4 years.
Actual results of operations for the three months ended March 31, 2002 and
the pro forma results of operations for the three months ended March 31, 2001
had we applied the provisions of SFAS 142 in that period follow (the impact on
amortization expense is the result of a cessation of amortization of goodwill,
the changed forward life of developed technologies and effect of the impairment
charge recorded in the fourth quarter of the year ended December 31, 2001):
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2002 2001
------------------- -----------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (844,000) $ (2,331,000)
Add back: Goodwill amortization - 427,000
Add back: Technology amortization 249,000 333,000
------------------- -----------------
Adjusted net income $ (595,000) $ (1,571,000)
=================== =================
NET LOSS PER SHARE - BASIC AND DILUTED
Reported net income $ (0.19) $ (0.59)
Goodwill amortization - 0.11
Technology amortization 0.06 0.08
------------------- -----------------
Adjusted net income $ (0.14) $ (0.40)
=================== =================
Weighted average common shares -
------------------- -----------------
basic and diluted 4,371,000 3,922,000
=================== =================
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
accounting and reporting for the impairments or disposal of long-lived assets.
It replaces SFAS No. 121. SFAS No. 144 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. This statement also focuses on reporting the
effect of a disposal. This statement became effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS No. 144 did not have a material
impact to the Company's financial position or results of operations.
INCOME TAXES
The Company accounts for income taxes using the asset/liability method
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax bases of assets and liabilities.
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 quarters
ended March 31, 2002 and March 31, 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" which allows
providing disclosure of compensation cost - see Note 8 to the Consolidated
Financial Statements.
10
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 quarter ending March 31, 2002 relate to the Company's Simione Consulting
segment which was sold on September 28, 2001. The Consulting business, previous
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.
MARCH 31,
------------------------------
2002 2001
------------------------------
Operating Revenue $ - $ 1,164
Income before Provision for Income Taxes - (185)
Income from Discontinued Operations
Net of Income Tax $ - $ (185)
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 Mr. 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 3-31-2002 $ 611,000 $ 99,000 $ 710,000
===================================================
Interest Rate 8.50% 5.65%
11
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - PURCHASED SOFTWARE, FURNITURE AND EQUIPMENT
Purchased software, furniture and equipment consisted of the following:
DEPRECIATION
MARCH 31, DECEMBER 31, ESTIMATED
2002 2001 USEFUL LIVES
--------------------------------------------------------
Furniture and Fixtures $ 1,448,000 $ 1,428,000 10 years
Computer equipment and purchased
software 6,237,000 6,237,000 5 years
-------------------------------------
7,685,000 7,665,000
Accumulated depreciation (6,275,000) (6,132,000)
-------------------------------------
$ 1,410,000 $ 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 is required to periodically review the value of its
intangible assets. During the fourth quarter of 2001, the Company's analysis and
review, utilizing the methodology of SFAS No. 121, resulted in an $11.8 million
impairment loss of the intangible assets of the Company. The major reasons for
the impairment were new technologies being integrated in the Company's current
and future products causing its existing product platforms to have reduced
future revenue generation capability, and an expectation that immediate
opportunities for new software sales are lower than were forecasted at the time
of the merger with MCS.
The following table summarizes the Company's changes in account balances
for its intangible assets since the MCS merger on March 7, 2000.
3/31/2002
ORIGINAL ASSETS IMPAIRMENT ACCUMULATED NET BOOK AMORTIZATION
COST DISPOSED WRITE - DOWN AMORTIZATION VALUE PERIOD
------------------ ---------------- ----------------- ----------------- ----------------- -------------
Developed technology $10,650,000 $ - $(4,220,000) $ (2,690,000) $ 3,740,000 4 years
Customer base 1,700,000 (510,000) - (275,000) $ 915,000 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) $ (6,130,000) $ 5,155,000
================== ================ ================= ================= =================
12
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Included in Note 1 to the Financial Statements is a table presenting actual
results of operations for the three months ended March 31, 2002 and pro forma
results of operations for the three months ended March 31, 2001. The pro forma
results for March 31, 2002 present the effect on earnings had the
nonamortization provisions of SFAS 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
Line of Credit:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- ----------------------
SHORT TERM:
Line of Credit $ 5,967,000 $ 5,572,000
Note Payable - Mestek - -
----------------------- ----------------------
$ 5,967,000 $ 5,572,000
======================= ======================
LONG TERM:
Convertible Note Payable - B.C. O'Donnell $ 600,000 $ 600,000
Convertible Note Payable - J.E. Reed (1) 4,500,000 3,500,000
Note Payable - Mestek 1,019,000 1,019,000
Note Payable - Mestek Capitalized Interest 40,000 40,000
Note Payable - J.E. Reed Capitalized interest 184,000 184,000
----------------------- ----------------------
$ 6,343,000 $ 5,343,000
======================= ======================
(1) Includes Mestek's participation in the J.E. Reed Facility
On July 12, 2000, the Company entered into a $6.0 million Loan and Security
Agreement facility with Wainwright Bank and Trust Company (the Wainwright
Facility), a commercial bank, under which the Company granted a first priority
position on substantially all of its assets as security. The Wainwright Facility
was used to pay off the line of credit with Silicon Valley Bank, certain
short-term loans from Mestek, Inc. (a related party, See Note 9), and a loan
from David O. Ellis. Borrowings under the Wainwright Facility accrue interest,
at the bank's prime rate per annum, require monthly payments of interest and
mature on July 12, 2002. 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. 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. Bruce Dewey's salary
13
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 new 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 March 31, 2002 and December 31,
2001, borrowings were equal to $4,500,000 and $3,500,000 respectively,
$1,000,000 of which was participated to Mestek at March 31, 2002 and at December
31, 2001, and $3,500,000 and $2,500,000 of which remains held by Mr. Reed at
March 31, 2002 and December 31, 2001, respectively. On December 31, 2001, the
facility was amended to change the interest rate to prime plus two percent, to
change the payment term 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 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.
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 March 31, 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 March 22,
2002, no such action has been taken and nothing further has been heard from
McLendon's attorney 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.
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
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 March 31, 2002 and December 31, 2001.
1,489,853 of such shares were issued on March 7, 2000 to the former MCS common
14
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
shareholders. 606,904 of such shares were issued on March 7, 2000 to the former
preferred shareholders and noteholders of CareCentric Solutions, Inc., which
shares were converted from Series A Preferred Stock into CareCentric (formerly
known as Simione Central Holdings Inc.) common shares in connection with the
merger.
Pursuant to the terms of the July 12, 1999 merger agreement by which
Simione acquired the stock of CareCentric Solutions, Inc., the Company was
required to issue up to an additional 606,904 shares of common stock to the
former preferred shareholders and noteholders of CareCentric Solutions if the
average closing price of the Company's stock for the period October 1, 2000
through December 31, 2000 is not equal to or greater than $15.00 per share.
Since the Company's average closing stock price for the fourth quarter of 2000
was less than $15.00 per share, on March 19, 2001, the Company issued 593,688
shares of its common stock to the former preferred shareholders and noteholders
of CareCentric Solutions. As required by generally accepted accounting
principles, no value was assigned to these shares as it was deemed not to impact
total consideration paid. The Company asserted that it was not required to issue
13,216 additional shares of its common stock as well as 150,740 shares of common
stock that were being held by it in escrow under the terms of the CareCentric
Solutions Merger Agreement based upon various indemnification and expense
overages claims it believes it had against the former CareCentric Solutions
preferred shareholders and noteholders. On May 16, 2001, the Company finalized a
settlement of these claims with the representative of the former CareCentric
Solutions parties pursuant to which 88,586 shares of common stock were released
from escrow and distributed to the former CareCentric Solutions preferred
shareholders and noteholders, the remaining 62,154 escrow shares were cancelled,
no additional shares of common stock will be issued, and the parties executed a
comprehensive settlement agreement.
Pursuant to a comprehensive settlement agreement on June 28, 2001, between
Sterling Star, Inc., Mr. Ted Wade (President of Sterling Star, Inc.) and the
Company, certain disputes related to the acquisition of a product named Tropical
Software, were settled. Under the terms of the settlement, 10,000 shares of
common stock originally issued to Sterling Star were returned to the Company and
were cancelled.
Preferred Stock-10,000,000 shares authorized
Series B Preferred Stock -$.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.
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.
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
15
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
equal to $2.51. The aforementioned number of shares and per share prices are 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.
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, were 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. Options
totaling 465,206 shares were outstanding, of which 267,332 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 March 31, 2002,
159,573 shares of such options were available under the original terms of
issuance.
STOCK PURCHASE WARRANTS
At March 31, 2002, the Company had outstanding warrants to purchase shares
of the Company's common stock as follows:
EXERCISE
COMMON SHARES PRICE EXPIRATION DATE
--------------- -------------- -------------------
25,000 $ 5.00 February 24, 2005
104,712 $ 2.51 July 12, 2003
490,396 $ 3.21 June 30, 2003
400,000 $ 10.88 March 7, 2003
---------------
1,020,108
===============
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.
R. Bruce Dewey is Vice-Chairman of the Board of Directors, and the
President and Chief Operating Officer of Mestek and 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 Note 6 and Note 8 to these Financial
Statements.
The Company has a note receivable from Simione Consultants, LLC of $611,000
at March 31, 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 March 31, 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.
16
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2002,
$4.5 million was outstanding under this credit facility, $3.5 million payable to
Mr. Reed, and $1.0 million payable to Mestek pursuant to a participation
agreement.
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.
NOTE 10 - LICENSE AGREEMENTS
The Company licenses certain software products from third parties for
incorporation in, or other use with, its products and is obligated to pay
license fees in connection with such products. The Company sublicenses such
products to its customers and collects fees in connection with such
sublicensees.
NOTE 11 - EXECUTIVE COMPENSATION
The Company has entered into an employment agreement with its President and
Chief Executive Officer, Mr. John Festa. Among other specific contents, Mr.
Festa (i) has been granted 210,000 shares of Series E preferred stock, one half
of which vest evenly over the course of three years from his hire date dependent
upon his continued employment as President and CEO and one half of which are
forfeitable pro rata over a three year period if certain financial milestones
are not met, (ii) payment of an annual bonus of up to 50% of his annual salary
based on completion of annual performance objectives, (iii) the possibility of
receiving a special bonus which varies in dollar amount in the event there is a
sale of the Company while Mr. Festa is President and CEO and for nine months
thereafter. The Series E preferred stock was valued at approximately $210,000
and will be charged to earnings as earned. The amount representing unearned
compensation is recorded as an increase in the stockholders deficit account. For
the three months ended March 31, 2002, approximately $23,000 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 $15.1 million at March 31, 2002. During the first quarter of 2002, the
Company continued to use its Wainwright Bank Credit Line and the Reed Credit
Line in order to meet its working capital needs.
The merger with Simione added additional products and resources and,
importantly, added to the Company's critical mass of installed sites but the
Company's longer term success will depend upon increased sales of new software
systems and successful installation performance. Additionally, the Company's
continuing efforts to develop new products using the latest software and
hardware platforms will be most important to its long-term success.
As of May 9, 2002, the Company had untapped credit capacity of
approximately $0.7 million from combined Wainwright Bank and Reed credit
facilities. As discussed in Note 13 below, and pending shareholder approval,
which is expected to be obtained, certain terms of the Wainwright and Reed
credit facilities will be changed. The Company believes that a successful
completion and closing of the refinancing and recapitalization plan (described
in more detail in Note 13), in combination with the funds available from cash to
be generated from future operations, 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. Notwithstanding the
financial conditions prevailing in the home health marketplace, the Company
17
CARECENTRIC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
continued to fund significant product development initiatives during 2001 and
intends to do so throughout 2002 by reinvesting the moneys saved in its
re-engineering which was undertaken beginning on February 5, 2002. Nevertheless,
until revenues increase sufficiently to cover fluctuations in forward-looking
costs and operating expenses, the Company remains dependent on its majority
shareholder for its working capital financing. The Company's majority
shareholder has stated his intention and ability to continue to advance cash to
the Company in accordance with the terms of his credit facility.
NOTE 13 - SUBSEQUENT EVENTS
On April 8, 2002, the Company secured two commitments for additional
financing, both from existing shareholders. John E. Reed, a director of the
Company, agreed to provide $871,117 in short-term funds, to be refinanced along
with other debt of the Company due Mr. Reed upon the obtaining of shareholder
approval in June, 2002. The refinancing would be evidenced by a $3,555,555
subordinated, secured convertible term note, with principal payable in a single
balloon payment in 60 months and with interest at a fixed rate of 6.25% deferred
and capitalized for 24 months. Interest would then be payable quarterly. The
note would be convertible at any time for common stock at a price of $1.00 per
share. The conversion rights of Mr. Reed's 398,406 shares of Series D Preferred
Stock would also be amended to increase the conversion exchange rate from one
share of common stock for one share of Series D Preferred to 2.51 shares of
common stock for one share of Series D Preferred Stock.
Mestek, Inc., a preferred shareholder of the Company, agreed to provide
$1,092,000 in short-term funds, to be refinanced along with other debt of the
Company due Mestek upon the obtaining of shareholder approval in June, 2002. The
refinancing would be evidenced by a $4,000,000 subordinated, secured convertible
term note, with principal payable in a single balloon payment in 60 months and
with interest at a fixed rate of 6.25% deferred and capitalized for 24 months.
Interest would then be payable quarterly. The note would be convertible at any
time for common stock of the Company at a price of $1.00 per share. The rights
of Mestek's 5,600,000 shares of Series B Preferred Stock would also be amended
to provide for a conversion exchange rate of 1.0714 shares of common stock for
one share of Series B Preferred Stock. Mestek will also give up its stock
options and a warrant it holds for the purchase of 104,712 shares of common
stock and will exchange a warrant it holds for 400,000 shares of common stock at
$10.875 per share, expiring March 7, 2003, for a Warrant for 400,000 shares of
common stock at $1.00 per share, expiring June 15, 2004. It will also exchange a
warrant it holds for 490,396 shares of common stock at $3.21 per share, expiring
March 7, 2003, for a Warrant for 490,396 shares of common stock at $1.00 per
share, expiring June 15, 2004.
A condition to the refinancing of the Company's debt to Mestek and Mr. Reed
is that the present $6.0 million Wainwright Bank line of credit facility be paid
down by the Company to $5.9 million or less on or before July 31, 2002 and
continue to be reduced by no less than $100,000 each month thereafter until all
amounts have been repaid to Wainwright or the Wainwright Facility or any
replacement thereof is obtained by CareCentric without a guarantee of Mestek.
The refinancing and recapitalization transactions between the Company and
each of Mestek and Reed are subject to the satisfaction of various conditions,
including approval by the Company's shareholders at its annual meeting expected
to be held in June 2002 and approvals by Mestek's board of directors and the
Company's senior lender. The transactions contemplated by the commitment
letters, if approved, would (i) reduce the total financing facilities of the
Company by approximately $0.3 million, (ii) extend the guaranty by Mestek of the
Company's senior line of credit with Wainwright Bank through the end of June
2003, (iii) refinance existing debt owed by the Company to Mestek and Reed to
provide a deferral of both interest and principal for a period of two (2) years
following the date that the commitment letters are approved, and (iv)
restructure certain of the Company's existing voting securities and warrants
held by Mestek and Reed.
Management believes the required shareholder approvals will be obtained.
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. 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.
On April 22, 2002, the Company employed George M. Hare as its Senior Vice
President and Chief Financial Officer. Mr. Hare has over twenty years of varied
experience in both financial and operating management positions and holds a
certified public accountant certificate from the state of Pennsylvania.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
the Private Securities Litigation Reform Act of 1995, and are subject to the
safe harbor created by such sections. When used in this report, the words
"believe", "anticipate", "estimate", "expect", "plans", "intend", "likely",
"will" and similar expressions are intended to identify forward-looking
statements. All statements, other than statements of historical facts, included
or incorporated by reference in this Form 10-K which address activities, events,
or developments which the Company expects or anticipates will or may occur in
the future, including statements regarding the Company's competitive position,
the successful development of its software products, the impact on the Company
of actual or proposed regulatory changes, the Company's expectations regarding
the adequacy of current financing arrangements, product demand and market
growth, and other statements regarding future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts are forward-looking statements. These statements are based on
certain assumptions and analyses made by the Company in light of its experience
and its perception of historical trends, current conditions, and expected future
developments as well as other factors it believes are appropriate in the
circumstances. The Company's future financial performance could differ
significantly from that set forth herein, and from the expectations of
management. Important factors that could cause the Company's financial
performance to differ materially from past results and from those expressed in
any forward looking statements include, without limitation, the inability to
obtain additional capital resources, variability in quarterly operating results,
customer concentration, product acceptance, long sales cycles, long and varying
delivery cycles, the Company's dependence on business partners, emerging
technological standards, changing regulatory standards, inability to retain or
hire experienced and knowledgeable employees, risks associated with
acquisitions, increased regulation of the health care industry, future
consolidation of the health care industry, potential liability in connection
with a Department of Labor investigation or IRS audit, the need to develop new
and enhanced products, product delays and errors, competition, difficulty
protecting intellectual property rights, and the risk factors detailed in the
Company's Registration Statement on Form S-4 (File No. 333-96529) and in the
Company's periodic reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. This Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto. The Company assumes no obligation to update publicly any such
forward-looking statements, whether as a result of new information, future
events, or otherwise.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of our 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 generally
accepted accounting principles 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.
19
REVENUE RECOGNITION
The Company sells its software pursuant to non-exclusive license agreements
which provide for the payment of a one-time license fee. In accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Revenue Recognition", these revenues are recognized when products are delivered
and the collectability of fees is probable, provided that no significant
obligations remain under the contract. Revenues derived from the sale of
software products not requiring significant modification or customization are
recognized when products are delivered and collectability of fees is probable,
provided that no significant obligations remain under the contract. The price of
the Company's software varies depending on the number of software modules
licensed and the number of users accessing the system and can range from under
ten thousand dollars to a few million dollars. The Company generally requires
payment of a deposit upon the signing of a customer order as well as certain
additional payments prior to delivery. As a result, the Company's balance sheet
reflects significant customer deposits.
Third-party software and computer hardware revenues are recognized when the
related products are delivered. Software support agreements are generally
renewable for one-year periods, and revenue derived from such agreements is
recognized ratably over the period of the agreements. The Company has
historically maintained high renewal rates with respect to its software support
agreements. The Company generally charges for software implementation, training
and technical consulting services as well as management consulting services on
an hourly or daily basis. The Company offers "tiered pricing" for implementation
of new systems whereby the customer pays a fixed fee for a certain level of
packaged services and daily fees for services beyond the package.
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
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 ended March 31, 2002 and March 31, 2001 compares
the 2002 reported Financial Statements in the accompanying Financial Statements
20
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 MARCH 31, 2002
Net Revenues. Revenues (exclusive of the Consulting segment which was
discontinued in September 2001) were $5.3 million for the three months ended
March 31, 2002 and $5.7 million for the three months ended March 31, 2001. The
$0.4 million decrease was mainly attributable to a reduction in software systems
of $0.5 million to $1.6 million in 2002 from $2.1 million in 2001. Maintenance
revenues were unchanged at $2.8 million in both 2002 and 2001.
The Company believes that the economic conditions for the home healthcare
marketplace, more fully discussed in the overview section of the Form 10-K for
the period ended December 31, 2001, have now stabilized, and are expected to
improve in the years ahead. The Company also recognizes the importance of
successfully introducing new products using more current technologies, and the
Company intends to continue to develop and invest in new products in 2002 and
beyond.
Cost of Revenues. Cost of revenues decreased $0.5 million, or 22.3%, to
$1.7 million in 2002 from $2.2 million in 2001. As a percentage of total net
revenues, cost of revenues decreased to 31.9% in 2002 from 37.7% in 2001. The
$0.5 million decrease resulted primarily from cost cutting, changes in product
mix and the decrease in revenues from software systems. The decrease as a
percentage of total net revenues is due to the combined impact of many factors
including efficiencies in installation and support costs resulting from reduced
sales discounts and changes in product mix.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $126,000, or 4.5%, to $2.7 million in 2002 from $2.8 million
in 2001. As a percentage of total net revenues, selling, general and
administrative expenses were 51.4% in 2002 and 49.3% in 2001. This dollar
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 $0.8 million, or 46.4%, to $0.9 million in 2002 from $1.7 million
in 2001. As a percentage of total net revenues, research and development
expenses decreased to 18.0% in 2002 from 30.9% in 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 value of research and expenditure expenses has fallen in the first
quarter of 2002, the Company believes the 18% of revenue level experienced in
the first quarter of 2002 is the proper amount to both enhance and maintain
existing products. 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 quarter of 2002.
Amortization and Depreciation. Amortization and depreciation decreased by
approximately $0.5 million to $0.4 million in 2002 from $1.0 million in 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 Loss. The Company's loss from continuing operations, reflecting
the same assumptions as above for purposes of comparability, decreased from $2.0
million for the three months ended March 31, 2001 to $644,000 for the three
months ended March 31, 2002. This decrease in loss from continuing operations is
due to the combined effect of reductions in selling, general and administrative,
research and development and amortization expenses. Continued high levels of
research and development expenditures over the last two years are a material
cause of the recurring loss from continuing operations, although the reduction
in research and development expenses in the first quarter of 2002 versus the
first quarter of 2001 positively contributed to the reduction in the first
quarter operating loss reported for 2002 compared to 2001.
Other Income (Expense). Interest expense related to borrowings under the
Company's line of credit agreements and capital lease obligations increased by
approximately $44,000 to $168,000 for the three months ended March 31, 2002 from
$124,000 for the three months ended March 31, 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
$128,000. The Company expects further increases in interest expense in 2002 due
to increased borrowing.
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,
21
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 March 31, 2002, and accordingly, a 100% deferred tax
valuation allowance has been recorded against these assets.
Loss from Operations of Discontinued Segment. The loss of ($185,000) for
the three months ended March 31, 2001 is attributable to the discontinued
operations of the Consulting segment.
BACKLOG
The Company's backlog associated with its software operations remained
unchanged at approximately $3.2 million on March 31, 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:
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
=================
22
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 Silicon Valley Bank (the
Company's commercial bank prior to the merger with MCS) line of credit, certain
short-term loans from Mestek, and the note payable to David O. Ellis. The
Wainwright Line of Credit expired July 11, 2001 and was renewed through July 11,
2002. Payment of the Wainwright Line of Credit is guaranteed by Mestek. Based
upon representations received from Wainwright Bank, the Company expects the Line
of Credit to be renewed through July 11, 2003. As of April 8, 2002, the Company
owes Wainwright approximately $5,967,000 under the Line of Credit.
The Company is obligated under an 18 month unsecured promissory note in the
principal amount of $1,018,000 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.
During 2000, 2001 and the first quarter of 2002, the Company incurred
operating losses and experienced significant problems collecting its accounts
receivable because of the uncertain operating condition of its customers due to
the negative effects of the current government limits over home medical cost
reimbursement and the costs to date of developing, implementing and supporting
The Smart Clipboard(R) product, which have been much higher than anticipated. 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 merger
with Simione added additional products and resources and, importantly, added to
the Company's critical mass of installed sites but the Company's longer term
success will depend upon increased sales of new software systems and successful
installation performance, including its point-of-care and MestaMed(R) systems.
In this connection, the Company recorded a significant increase in bookings of
new systems in several of its major product lines through March 2002. Bookings
have increased steadily through the first quarter of 2002 and prospect
opportunities have been clearly identified. The existing pipeline, if realized,
will exceed the Company's 2002 bookings budget and cash flow needs.
Notwithstanding the financial conditions prevailing in the home health
marketplace, the Company continued to fund significant product development
initiatives during 2001. Accordingly, until revenues increase sufficiently to
cover these forward-looking costs and operating expenses, the Company remains
dependent on outside funding sources, including John E. Reed, Mestek and
Wainwright Bank and Trust Company, for its working capital financing.
On April 8, 2002, the Company secured two commitments for additional
financing, from existing shareholders John Reed and Mestek. See Notes 12 and 13
to the Financial Statements. Mr. Reed and Mestek have agreed to provide $871,117
and $1,092,000 in short-term debt financing, respectively, to be refinanced
along with other debt of the Company due such parties upon obtaining shareholder
approval in June 2002.
As of May 9, 2002, the Company had untapped credit capacity of
approximately $0.7 million from the aforementioned Reed and Wainwright Bank
facilities. The Company believes that a successful completion of its refinancing
commitments from John Reed and Mestek, in combination with the funds available
from its cash, cash equivalents and cash to be generated from future operations,
will be sufficient to meet the Company's operating requirements, assuming no
material adverse change in the operation of the Company's business, until at
least December 31, 2002. See also Note 12 to Financial Statements.
23
The table below summarizes the Company's debt and other contractual
obligations:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS
----------------------- ----- ------ --------- ---------
Long-Term Debt $ 6,343,000 $ -- $1,243,000 $5,100,000
Capital Lease Obligations 27,000 27,000 -- --
Operating Leases 5,145,000 2,359,000 2,114,000 672,000
Line of Credit 5,967,000 5,967,000 -- --
Other Long-Term Obligations 1,302,000 702,000 600,000 --
----------- ---------- ---------- ----------
Total Contractual Cash Obligations $18,038,000 $8,669,000 $4,107,000 $5,262,000
=========== ========== ========== ==========
As of March 31, 2002, the Company had negative working capital of $15.3
million and cash equivalents of $0.5 million. The Company's current liabilities
as of March 31, 2002 include customer deposits of $2.1 million and unearned
revenues of $4.1 million.
Net cash used in operating activities for the years ended March 31, 2002
and March 31, 2001 was $1.1 million, and $1.7 million, respectively.
Cash flows from financing activities include the Wainwright and Reed lines
of credit borrowings during 2002.
Inflation has not had, and is not expected to have, a material impact on
the Company's operations. If inflation increases, the Company will attempt to
increase its prices to offset increased expenses. No assurance can be given,
however, that the Company will be able to adequately increase its prices in
response to inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 141 addresses financial accounting and reporting for all business
combinations and requires that all business combinations entered into subsequent
to June 2001 be recorded under the purchase method. This statement also
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 142 addresses
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets at acquisition. This statement also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. These statements were adopted by the Company on
January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized. In the
place of amortization, the Company is required to periodically review the
valuation of the Company's intangible assets using a discounted cash flow
estimation approach. Following the accounting for impairment discussed
immediately below, which has been made under the rules of SFAS No. 121, the
effect of adopting SFAS No. 141 and 142 was limited to changes in amortization
expense for the periods after December 31, 2001. Additionally, the assembled
workforce intangible asset has been recharacterized as goodwill, which will no
longer be amortized under the rules of SFAS No. 142.
Accounting for impairment. For the years ended December 31, 2001, 2000 and
1999, the Company reported its accounting for intangible assets under SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30. Under the rules of SFAS No. 121, the Company performs periodic
analysis to determine if the Company's intangible assets have been impaired
using a combination of discounted and undiscounted estimated cash flow
estimations. In the fourth quarter of 2001, the Company determined that the
combination of new technologies being integrated in the Company's current and
future products would result in its existing product platforms having smaller
future revenue generation capability. Additionally, the Company determined that
the continued support of existing products while migrating to new technology
platforms would result in a lower estimated cash value to the Company of
existing products. The resulting impairment to the intangible assets of the
Company was $11.8 million. As further detailed in Note 5 of the Financial
Statements, the intangible assets of the Company, after the impairment charge,
will be Developed Technologies, Customer Base and Assembled Workforce.
On October 3, 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that replaced SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of." The primary objectives of this project were to develop one
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sales and to address significant
implementation issues. The accounting model for long-lived assets to be disposed
of by sale applies to all long-lived assets, including discontinued operations,
24
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 see whether 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of March 31, 2002, the Company's obligations include variable rate notes
payable and a line of credit bank note with aggregate principal balances of
approximately $12.3 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 $107,000 per year.
At March 31, 2002, the Company had accounts receivable of approximately
$5.4 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 March 22,
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. 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.
Item 3. Defaults Upon Senior Securities.
None.
25
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the
Company.
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)).
10.46 Convertible Note Agreement dated as of August 8, 2000 by and
between the Company and Barrett C. O'Donnell.
10.46.1 Convertible Promissory Note dated August 8, 2000 from the
Company in favor of Barrett C. O'Donnell.
10.46.2 First Amendment to Convertible Note Agreement and
Convertible Promissory Note dated as of January 21, 2002 by
and between the Company and Barrett C. O'Donnell.
(b) Reports on Form 8-K:
On February 8, 2002, the Company filed a Form 8-K regarding
its plan to realign its business.
On March 29, 2002, the Company filed a Form 8-K regarding a
change to its 2001 earnings for an impairment write-down of
goodwill and other intangible assets.
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: May 15, 2002 By:/s/ George M. Hare
--------------------------------
GEORGE M. HARE
Sr. Vice President and
Chief Financial Officer
(Principal Financial Officer)
26
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