U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission file number 0-20356
CYBERCARE, INC.
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(Exact name of registrant as specified in its charter)
Florida 65-0158479
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2500 Quantum Lakes Drive, Suite 1000, Boynton Beach, Florida 33426-8330
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(Address of principal executive offices)
(561) 742-5000
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(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s)), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The registrant has one class of common stock, $0.0025 par value, of which
69,873,357 shares were outstanding as of April 30, 2002.
CYBERCARE, INC.
10-Q FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2002 (unaudited) and December 31, 2001 3
Condensed Consolidated Statements of
Operations (unaudited) for the Three Months Ended
March 31, 2002 and 2001 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the Three Months Ended
March 31, 2002 and 2001 5
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
CYBERCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
2002 2001
-------------------- --------------------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 262 $ 693
Cash - restricted 276 373
Trade accounts receivable, less allowance for doubtful accounts of
$2,121 (2002) and $1,859 (2001) 2,883 4,293
Inventories, net 2,734 2,599
Notes receivable - related parties, less allowance to reduce to
realizable value of $687 (2002) and $604 (2001) 166 228
Notes and interest receivable 1,121 1,164
Other current assets 678 867
-------------------- --------------------
Total current assets 8,120 10,217
Property and equipment, net 2,220 2,439
Goodwill, net 4,661 5,085
Licenses, net 9,669 9,992
Notes receivable 2,686 2,455
Other assets 552 1,041
-------------------- --------------------
Total assets $ 27,908 $ 31,229
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,506 $ 3,015
Accrued liabilities 7,278 5,724
Notes payable 1,272 85
Lines of credit 1,038 974
Net liabilities of discontinued operations 1,537 1,660
Deferred revenue 31 746
Other current liabilities 161 169
-------------------- --------------------
Total current liabilities 13,823 12,373
Convertible subordinated debentures, net of discounts of $1,736 (2002)
and $1,924 (2001) 9,764 8,076
Other liabilities 296 361
-------------------- --------------------
Total liabilities 23,883 20,810
-------------------- --------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 20,000,000 shares authorized; 19,800,000 shares
available for issuance - -
Common stock, $0.0025 par value, 200,000,000 shares authorized;
69,433,357 and 67,827,992 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively 174 170
Capital in excess of par 127,920 127,055
Stock subscription receivable (4,740) (4,740)
Accumulated deficit (119,329) (112,066)
-------------------- --------------------
Total stockholders' equity 4,025 10,419
-------------------- --------------------
Total liabilities and stockholders' equity $ 27,908 $ 31,229
==================== ====================
See Notes to Condensed Consolidated Financial Statements.
3
CYBERCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------------
2002 2001
-------------------- --------------------
Net sales $ 4,972 $ 4,244
-------------------- --------------------
Costs and expenses:
Costs of services 3,889 3,274
Selling, general and administrative 5,738 2,763
Research and development 982 3,417
Depreciation and amortization 531 554
Litigation and legal settlement costs 87 -
Loss (gain) on sale of subsidiaries 515 (92)
-------------------- --------------------
Total costs and expenses 11,742 9,916
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Operating loss (6,770) (5,672)
-------------------- --------------------
Other income (expense):
Interest income 160 644
Interest expense (446) (53)
Amortization of beneficial conversion feature and discount (221) -
Other income 14 56
-------------------- --------------------
Total other (expense) income (493) 647
-------------------- --------------------
Net loss (7,263) (5,025)
==================== ====================
Loss per common share - basic and diluted: $ (0.11) $ (.08)
==================== ====================
Weighted average shares outstanding 68,553,527 64,803,947
==================== ====================
See Notes to Condensed Consolidated Financial Statements
4
CYBERCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------------
2002 2001
-------------------- --------------------
Cash Flows from Operating Activities:
Net loss $ (7,263) $ (5,025)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 209 160
Amortization 322 394
Provision for doubtful accounts 1,207 267
Amortization of beneficial conversion feature and discount 221 -
Net liabilities of discontinued operations - (182)
Net assets of discontinued operations - (259)
Loss (gain) on sale of subsidiaries 515 (92)
Changes in operating assets and liabilities, net of effects of
dispositions:
Trade accounts receivable (50) (804)
Inventories (135) (1,268)
Notes receivable and other current assets 294 (422)
Accounts payable (509) (571)
Accrued and other current liabilities 1,183 499
-------------------- --------------------
Net cash used in operating activities (4,006) (7,303)
-------------------- --------------------
Cash Flows from Investing Activities:
Purchase of marketable securities - (511)
Proceeds from sale of marketable securities - 500
Restricted cash 97 (315)
Repayment from related parties, net 5 1,100
Capital expenditures (57) (185)
Change in intangible, notes receivable and other assets 400 180
-------------------- --------------------
Net cash provided by investing activities 445 769
-------------------- --------------------
Cash Flows from Financing Activities:
Other liabilities (51) (193)
Net borrowings under lines of credit 64 306
Net borrowings under notes payable 1,403
Proceeds from exercise of stock options and warrants - 94
Proceeds from sale of common stock 214 -
Proceeds from sale of convertible debentures 1,500 -
-------------------- --------------------
Net cash provided by financing activities 3,130 207
-------------------- --------------------
Net decrease in cash and cash equivalents (431) (6,327)
Cash and cash equivalents at the beginning of period 693 15,231
-------------------- --------------------
Cash and cash equivalents at the end of period $ 262 $ 8,904
==================== ====================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 37 $ 53
==================== ====================
See Notes to Condensed Consolidated Financial Statements.
5
CYBERCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Supplemental disclosures of non-cash investing and financing activities:
For the Three Months Ended
March 31, March 31,
2002 2001
-------------------- --------------------
Fair market value of detachable warrants issued with convertible
subordinated debentures $ 12 $ -
Beneficial conversion feature on convertible debentures 21 -
Common stock issued for payment of accrued expenses 310 -
Common stock issued for Employee Stock Purchase Plan 45 40
Common stock issued for accrued contribution to retirement plan 102 61
Common stock issued for accrued settlement of a lawsuit - 125
Common stock received as consideration for sale of subsidiary - (692)
Common stock issued for payment of accrued interest 162 366
Common stock received in repayment of note receivable - (183)
Common stock received in repayment of stock subscription receivable - (65)
Property and equipment included in other liabilities - 470
The following is a summary of the significant non-cash amounts that resulted
from the Company's dispositions:
For the Three Months Ended
March 31, March 31,
2002 2001
-------------------- --------------------
Assets disposed:
Accounts receivable $ (338) $ (196)
Property and equipment (58) (76)
Goodwill (424) (412)
Other assets 232 -
-------------------- --------------------
Assets disposed (588) (684)
-------------------- --------------------
Liabilities transferred:
Accounts payable - 64
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Accrued expenses and short-term debt 73 20
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Liabilities transferred 73 84
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Common stock 515 600
-------------------- --------------------
Cash received from dispositions $ - $ -
==================== ====================
6
CYBERCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 1 - Organization and Summary of Significant Accounting Policies
Organization
CyberCare, Inc. ("CyberCare" or the "Company") is a holding company, which
is primarily comprised of a physical therapy and rehabilitation business, a
pharmacy business, and a healthcare technology solutions business. Our overall
goal is to improve the delivery and quality of healthcare for patients while
adding incremental value to our customers' clinical and business processes. Our
physical therapy and rehabilitation business operates clinics throughout the
State of Florida. Its caring staff of clinicians and therapists compliment
traditional primary care, orthopedic and neurological physician services and
serve a wide range of patients requiring physical and occupational therapy and
other rehabilitation services. Our pharmacy business supports thousands of
patients and residents in assisted living and other long-term care facilities
located in Florida. It also is licensed for mail order distribution across all
fifty states.
Our healthcare technology business utilizes its intellectual property,
including patented technology, to deliver tele-monitoring solutions addressing
the entire continuum of care. Its Electronic HouseCall(R) (EHC(TM)) hardware and
software technology focuses on the chronically ill, wellness management and
wound care. The EHC(TM) family of products and services permit enhanced
physician supervision and oversight and enable remote medical and wellness
monitoring and real-time interactive communications between patients and
caregivers. This is made possible through various monitoring devices, hardware
and software applications and our ability to establish an interactive network
across the health care continuum and among a community of users and providers.
In combination with our customers' clinical and business processes, the EHC(TM)
System allows for effective and efficient data collection, integration and
security, while successfully supporting case management and promoting personal
participation and interaction.
Going Concern
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying condensed consolidated financial statements, the Company incurred a
net loss for the three months ended March 31, 2002 of $7,263,000, negative cash
flow from operations of $4,006,000, and a working capital deficiency of
$5,703,000 at March 31, 2002. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
The condensed consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations, to obtain
additional financing, and ultimately, to attain successful operations.
7
There can be no assurances that such capital will be available to the Company on
acceptable terms, or at all.
In addition, on April 12, 2002, the Company entered into an agreement with
investors for an additional $10,000,000 - $15,000,000 of capital. Funding of
this amount is contingent upon the Company achieving certain milestones. There
can be no assurances that the Company will achieve these milestones. Management
has reduced the overall cash burn rate by 50% during the three months ended
March 31, 2002, as compared to the 2001 level, and expects further reductions to
be reflected within the second quarter 2002. Management is also continuing to
assess the Company's operating structure for the purpose of increasing sources
of revenue and seeking additional funding.
Future Capital Needs
For the three months ended March 31, 2002 and for the year ended December
31, 2001, the Company incurred significant operating losses and cash flow
deficiencies. The Company expects to incur additional losses for the remainder
of 2002 as it carries out its business plan. The Company may raise funds through
the sale of non-tele-monitoring assets and is continuing to reduce its overall
monthly cash burn rate and is seeking additional equity or debt financing. The
Company believes that it will reduce its costs to a level whereby it can sustain
its operations, while at the same time seeking alternative funding sources.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been
prepared by the Company and are unaudited pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information related to the
Company's significant accounting policies and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. In the opinion of management, these unaudited condensed consolidated
financial statements reflect all material adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the interim
periods presented. These results are not necessarily indicative of a full year's
results of operations. Certain reclassifications have been made to the prior
period financial statements to conform to the March 31, 2002 presentation.
Although the Company believes that the disclosures provided are adequate to
make the information presented not misleading, these unaudited interim condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
The Company's condensed consolidated financial statements include the
activity of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets".
SFAS 141 requires that all
8
business combinations initiated after June 30, 2001 be accounted for under a
single method - the purchase method. Use of the pooling-of-interests method is
no longer permitted. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment upon initial adoption of the
Statement and on an annual basis going forward. The amortization of goodwill
ceased upon adoption of SFAS 142 as of January 1, 2002. The Company believes
that the adoption of these standards will have no material impact on its
financial statements or results of operations except for elimination of
amortization of Goodwill of approximately $290,000 per year.
NOTE 2 - Subordinated Debentures and Private Equity Line
In January 2002, the Company issued an 8% debenture in the amount of
$172,000 that was satisfied on April 23, 2002. The debenture was collateralized
by a pledge of 400,000 shares of the Company's common stock, owned by a former
officer and director.
In March 2002, the Company entered into a term sheet with an investor (the
"Lender") whereby the Company may borrow up to $5,000,000 in exchange for senior
convertible promissory note(s) (the "Convertible Notes"). The Convertible Notes
have a 12-month term and requires interest at 10% per annum, increasing to 15%
retroactively upon default. At the election of the Lender, both principal and
interest are convertible into the Company's common stock at 85% of the closing
bid price on the day prior to conversion, but in no event less than $0.30 per
share or more than $1.25 per share. The Company issued warrants to purchase
250,000 shares of common stock at $0.75 per share, exercisable within 24 months
for each $2,500,000 funded by the Lender. As of March 31, 2002, the warrants
were valued at $12,000 using the Black-Scholes valuation method. The Company is
also liable for a commission (payable in cash and warrants) and the Lender's
legal fees in connection with review of the transactional documents and closing
of the transaction. All of the underlying shares, whether through conversion of
the Convertible Notes or exercise of the warrants, have registration rights. As
of May 8, 2002, the Company has issued the Convertible Notes for the entire
$5,000,000 under this commitment as described in the following three paragraphs.
The Company received $900,000 (less fees of $100,000) for working capital
purposes and issued a $1,000,000 60-day promissory note dated January 22, 2002
to Dynamic Holdings Corporation and its principal (the "Note"). The Note was due
on March 22, 2002 and interest was due on the unpaid principal balance at the
rate of 8% per annum. The Company refinanced the Note without penalty by issuing
a $1,250,000 convertible promissory note dated April 5, 2002 ("Dynamic Note"),
which is part of the $5,000,000 commitment discussed above. The Dynamic Note is
secured, by the outstanding balance of that certain $3,225,000 promissory note
dated October 31, 2000, given by Outreach Programs, Inc. to the Company in
exchange for the sale of 100% of the stock in Carolina Rehab, Inc.
The Company received $228,000 (less fees of $2,000) for working capital
purposes and issued a $230,000 10-day promissory note dated February 25, 2002 to
Dynamic Holdings Corporation. Interest on the unpaid principal balance accrues
at the rate of 8% per annum. This note was satisfied through an offset against
amounts borrowed under a $1,250,000 convertible promissory note issued to
Manford Investments, LLC (an affiliate of Dynamic Holdings and C.C. Fortune
Ventures, LLC) dated April 4, 2002 (the "Manford Note"). The Manford Note is
part of the $5,000,000 commitment discussed above.
9
The Company received $2,500,000 (less fees of $150,000) for working capital
purposes and issued a $2,500,000 senior convertible promissory note to C.C.
Fortune Venture, LLC dated March 7, 2002, which is part of the $5,000,000
commitment discussed above.
The Company entered into a Private Equity Line Agreement ("Agreement")
dated as of September 14, 2001 with Strategic Investment Management SA, an
entity organized under the laws of the British Virgin Islands ("SIM"). Under the
Agreement, the Company has the right to require SIM to purchase, from time to
time, the Company's common stock (a "Put"), in an aggregate amount not to exceed
$15,000,000. On February 28, 2002, the Agreement was amended to increase the
equity line from $15,000,000 to $30,000,000. The price for each share purchased
pursuant to a Put is 85% of the lower of the closing bid price or the lowest
trading price for the Company's common stock (as reported by Bloomberg, L.P.) on
the trading day on which a Put notification is delivered by the Company to SIM.
The maximum number of shares of common stock the Company is permitted to Put to
SIM in any seven-trading day period is 17.5% of the average daily trading volume
(measured over the 10-day period prior to the Put notification) multiplied by a
factor of five. Each Put must be for at least 10,000 shares of the Company's
common stock. Any "Put" is at the Company's option.
Through March 31, 2002, the Company effectuated one "Put" for 500,000
shares of the Company's common stock and received proceeds in the amount of
$214,000 from SIM. The Company is required to consummate minimum Puts of
$1,000,000 of the Company's common stock during the term of the Agreement. The
total number of shares of common stock, which may be owned at any point in time
by SIM under the Agreement may not exceed 19.9% of the total outstanding common
shares of the Company. The Agreement will terminate at the earlier of
twenty-four months after the commencement of the commitment period or the date
on which the Company has made Puts with an aggregate investment amount equal to
$30,000,000.
NOTE 3 - Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs.
Inventories consist of the following:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
Component parts $ 1,759,000 $ 1,616,000
Work-in-process 29,000 29,000
Finished goods 946,000 954,000
----------- -----------
$ 2,734,000 $ 2,599,000
=========== ===========
Included in finished goods as of March 31, 2002 is $467,000 of inventory that
has been shipped to but not installed by customers.
NOTE 4 - Dispositions
Effective September 30, 2001, the Company entered into an agreement to sell
the operating subsidiaries comprising its air ambulance business ("Air") to
Global Air Response, an unrelated party ("GAR"). The transaction was not
completed because certain guarantees made
10
by certain of the operating subsidiaries could not be released to the
satisfaction of GAR. Key management personnel of Air, along with certain
unrelated third parties, expressed an interest in acquiring the air ambulance
business under the same terms as the GAR transaction. In anticipation of this
transaction, Air's key management team formed a corporation ("AIM").
Effective December 3, 2001, the Company and the Air entities entered into a
transaction with AIM (the "AIM Agreement") in which AIM assumed the
office/hangar leases, purchased the existing furniture, fixtures and equipment
(except aircraft) and acquired the corporate telephone numbers, corporate names,
employees and a Federal Aviation Administration ("FAA") 135 Certificate issued
to Air. The Company retained ownership of the Air aircraft and will remain
liable for approximately $13,700,000 of the aircraft financing. Although the
Company intends to sell the aircraft as soon as practicable, as part of the
transaction, AIM has agreed to lease certain of the aircraft for as long as the
Company owns them, up to a maximum of 30 months, for use in AIM's business. The
Company has the right to sell any of the leased aircraft at any time to a third
party upon providing AIM a thirty day right-of-first-refusal to match the third
party offer. If AIM does not exercise its right, the Company can consummate the
sale of the aircraft to the third party.
Pursuant to the AIM Agreement, AIM issued a $5,000,000 promissory note (the
"AIM Note") which bears interest at 6% and is convertible into a 19.9%
dilutable, non-voting interest in AIM. Repayment of the AIM Note, including
interest, is contingent upon AIM obtaining agreed upon levels of net
distributable profits of AIM (as defined in the transaction documents). Due to
the uncertainty surrounding collection of such payments, the Company has fully
reserved the AIM Note as of December 31, 2001.
For financial accounting purposes, a sale will not be recognized until the
Company sells all of its aircraft and is removed from the related debt
guarantees. Accordingly, until such event occurs, the operations of the air
ambulance segment will be accounted for as discontinued operations. At March 31,
2002, the Company had a $1,000,000 accrual for the estimated future operating
losses of Air.
PHYSICIAN PRACTICE - Effective January 26, 2001, the Company sold certain
assets and related liabilities of its physician practice to a related party in
exchange for the return of 140,000 common shares of the Company owned by the
related party valued at $691,000. The Company recognized a gain in the amount of
$92,000 on this transaction.
SOUTHEAST ACQUISITION AND DISPOSITION - The Company originally acquired
100% of the outstanding common stock of Southeast Medical Centers, Inc.
("Southeast") effective August 1, 1999. Effective January 7, 2002, the Company
entered into a comprehensive settlement agreement (the "Southeast Agreement")
involving the transfer of Southeast to Southeast's former owners. Under the
Southeast Agreement, the Company transferred 100% of the stock of Southeast and
received a $281,000 note which bears interest at 8.0% and is payable over three
years. The note is collateralized by the stock of Southeast. The Southeast
Agreement also calls for the waiver of any contingent consideration that would
have been due under the terms of the original purchase agreement between the
Company and former owners. The Company recognized a loss on the sale of this
subsidiary of approximately $515,000 from this transaction during the first
quarter of 2002.
The following unaudited pro forma financial data is presented to illustrate
the estimated effects on the condensed consolidated results of operations as if
the Company's dispositions had occurred as of the beginning of each calendar
year presented after giving effect to certain
11
adjustments, including amortization of goodwill and related income tax effects.
The pro forma financial information does not purport to be indicative of the
results of operations that would have occurred had the transactions taken place
at the beginning of the periods presented or of future results of operations.
THREE MONTHS ENDED MARCH 31,
2002 2001
----------------- ------------------
Revenue $ 4,972,000 $ 3,892,000
Net loss $ (6,748,000) $ (5,065,000)
Net loss per common share (basic and diluted) $ (0.10) $ (0.08)
NOTE 5 - Litigation and Contingencies
LITIGATION - The Company is engaged in litigation with various parties
regarding matters of dispute that have arisen in the normal course of business.
The Company anticipates that there will not be a material impact on its
financial condition or results of operations from the outcomes of these legal
actions, except as discussed in the following paragraphs.
The Company has previously disclosed the 14 purported class action lawsuits
that were filed against CyberCare and certain of its executive officers alleging
violations of federal securities laws. These lawsuits were consolidated into a
single class action lawsuit by the United States District Court for the Southern
District of Florida on November 4, 2000. The Consolidated Amended Complaint
("Complaint") principally alleges that the Company and certain of its officers
and directors made misrepresentations or omissions regarding the development and
future sales forecasts of its Electronic HouseCall(R) system products and
revenues of its pharmacy division. On April 19, 2002, counsel for the parties
entered into a Memorandum of Understanding addressing the terms of a settlement
(the "Settlement"). The Settlement involves the payment of $3.1 million, to be
provided under an insurance policy, and the issuance by the Company of 5,000,000
shares of stock (subject to certain sale restrictions), without any admission of
liability by the Company. The Settlement is subject to definitive settlement
documents and approval by the court. As of March 31, 2002, the Company has
accrued $800,000 for this liability which is included in litigation and legal
settlement costs contained in the statement of operations.
Our Physical Therapy and Rehabilitation subsidiary ("PT&R") received a
letter from the Center for Medicare and Medicaid Services ("CMS") and its
intermediary in April 2001 notifying it of the suspension of Medicare payments.
CMS alleged that certain patient complaints, which constituted less than 1% of
PT&R's Medicare patients, and other alleged regulatory non-compliance, justified
the payment suspension. During the suspension, the Medicare program continued to
process PT&R's claims, but held payment in escrow. In August 2001, the
suspension was lifted and payment for processed claims was released although
approximately $1,115,000 remained held in escrow, pending further review. CMS
completed its review and issued its formal determination in April 2002. CMS
determined that approximately $1,191,000 in overpayment was made. Approximately
$76,100 in repayment is required (together with an offset of the amounts held in
escrow) to satisfy the overpayment. PT&R disputes the overpayment and is
submitting a rebuttal to CMS's determination. As of March 31, 2002, the Company
has recorded an allowance for the entire overpayment.
12
A complaint was filed against the Company on August 13, 2001, alleging that
the Company breached certain obligations in connection with the removal of a
restrictive legend from stock issued to the plaintiff. Mediation was held in
March 2002, which resulted in settlement of the dispute. The settlement requires
the Company to issue shares of common stock equal in value to $200,000 (to be
registered and valued at the time of filing a registration statement), transfer
of the Sleep Disorder Center (previously owned by the plaintiff) back to the
plaintiff, and make a cash payment, which the Company's insurance carrier has
agreed to cover of $200,000. Completion of the settlement is forthcoming,
pending finalization of settlement documentation. As of March 31, 2002, the
Company has accrued $200,000 for this liability, of which $100,000 is included
in litigation and legal settlement costs contained in the statement of
operations for the three months ended March 31, 2002 and $100,000 was accrued as
of December 31, 2001.
A complaint was filed against the Company by IMRglobal (n/k/a CGI
Information Technology Services) on November 21, 2001 in the 6th Judicial
Circuit in and for Pinellas County, Florida, alleging that the Company breached
its obligations to make payment for software development services of $1,113,000.
A settlement has been reached whereby the Company has agreed to pay $150,000 and
issue 500,000 shares of its common stock to the plaintiff. The shares are to be
registered, but will be subject to certain sale restrictions.
In February 2002, an arbitration panel determined that the Company is
responsible for damages and attorneys' fees in connection with the Company's
performance under an option agreement. From inception, the Company believed
there was no merit to the claim and damages, if any, were covered under an
insurance policy. The insurer later asserted that an exclusion from coverage
applied. As part of the settlement reached at the mediation of the class action
litigation, the Company waived its claim against the insurer for the coverage
denial. On April 29, 2002 an Award of Arbitrators was issued for $1,114,000. As
of March 31, 2002, the Company has accrued the full amount of this liability.
NOTE 6 - Changes in Stockholders' Equity
During the three months ended March 31, 2002, the Company issued:
- 54,453 shares of its common stock, valued at $45,000, under the employee
stock purchase plan,
- 170,066 shares of its common stock, valued at $162,000, as partial
payment for interest owed on subordinated debentures,
- 116,666 shares of its common stock to two former executives for the
exercise of stock options on a cashless basis,
- 657,791 shares of its common stock, valued at $310,000, for payment of
certain outstanding accounts payable,
- 500,000 shares of its common stock, valued at $214,000, under the
private equity line, and
- 106,389 shares of its common stock, valued at $102,000, for its
contribution to the Company's retirement plan.
13
NOTE 7 - Operating Segments
The Company has organized and determines its segments based on market
segment operating groups. Each group reports its results of operations and makes
requests for capital expenditures and acquisition funding to the individual
management of the segment, the Chief Financial Officer, and the Chief Executive
Officer. Under this organizational structure, the Company's operating groups
have been aggregated into three reportable operating segments: physical therapy
and rehabilitation services and pharmacy services (collectively "services") and
technology.
The other category presented below includes the corporate office and
elimination of intercompany activities, neither of which meet the requirements
of being classified as an operating segment. As discussed in Note 4, the Company
entered into an agreement to sell Air during September 2001. Accordingly, Air is
not separately presented below for either March 31, 2002 or 2001, but rather is
included as part of the Other category because the Company is accounting for
this disposition as a discontinued operation.
The Company evaluates the performance of its reportable operating segments
based primarily on net sales, net loss and working capital (deficit). Segment
information for the three months ended March 31, 2002 and 2001 is as follows:
Physical Therapy
For the three months and
ended March 31, 2002 Rehabilitation Pharmacy Total Services Technology Other Consolidated
-------------------- ---------------- -------- -------------- ---------- ----- ------------
Net sales $ 2,853,000 $ 1,790,000 $ 4,643,000 $ 329,000 $ - $ 4,972,000
Net (loss) **(400,000) (57,000) **(457,000) (3,598,000) (3,208,000) (7,263,000)
Working capital (deficit) 321,000 394,000 715,000 $ (363,000) (6,055,000) (5,703,000)
Total assets $ 4,030,000 $ 2,301,000 $ 6,331,000 $15,200,000 $ 6,377,000 $ 27,908,000
For the three months
ended March 31, 2001
--------------------
Net sales *$ 2,667,000 $1,331,000 *$ 3,998,000 $ 246,000 $ - $ 4,244,000
Net (loss) income 563,000 (162,000) 401,000 (5,358,000) (68,000) (5,025,000)
Working capital (deficit) 534,000 (305,000) 229,000 3,256,000 19,101,000 22,586,000
Total assets $ 5,038,000 $2,285,000 $ 7,323,000 $20,488,000 $26,361,000 $ 54,172,000
* Includes $352,000 of revenue generated by the two subsidiaries disposed
of in January 2002 and January 2001.
** Includes $691,000 additional accrual for Medicare audit.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT
This Quarterly Report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "could," "may," "will," "believes," "anticipates,"
"plans," "expects," "projects," "estimates," "intends," "continues," "seeks,"
"predicts," "expectations," variations of such words and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to predict.
As a result, because these statements are based on expectations as to future
performance and events and are not statements of fact, actual events or results
may differ materially from those expressed or forecast in such forward-looking
statements. Factors that might cause the Company's actual results to differ
materially from those indicated by such forward-looking statements include,
without limitation, those discussed in our filings with the Securities and
Exchange Commission, including, but not limited to, our most recent proxy
statement and "Risk Factors" in our most recent Form 10-K, as well as Future
Factors that may have the effect of reducing our available operating income and
cash balances.
Future Factors include risks associated with the uncertainty of future
financial results; government approval processes; changes in the regulation of
the healthcare and technology industries at either the federal or state levels;
changes in reimbursement for services by government or private payors;
competitive pressures in the healthcare and technology industries and the
Company's response thereto; delays or inefficiencies in the introduction,
acceptance or effectiveness of new products; the impact of competitive products
or pricing; the Company's relationships with customers and partners; cash
expenditures related to possible future acquisitions and expansions; on-going
capital expenditures; the Company's ability to obtain capital on favorable terms
and conditions; increasing prices of products and services; U.S. and non-U.S.
competitors, including new entrants; rapid technological developments and
changes and the Company's ability to continue to introduce competitive new
products and services on a timely, cost-effective basis; the mix of products and
services; the availability of manufacturing capacity, components and materials;
the ability to recruit and retain talent; the achievement of lower costs and
expenses; credit concerns in the emerging service provider market; customer
demand for the Company's products and services; U.S. and non-U.S. government and
public policy changes that may affect the level of new investments and purchases
made by customers; changes in U.S. and non-U.S. governmental regulations;
protection and validity of patent and other intellectual property rights;
reliance on large customers and significant suppliers; the ability to supply
customer financing; technological implementation; cost/financial risks in the
use of large, multiyear contracts; the Company's credit ratings; the outcome of
pending and future litigation; continued availability of financing, financial
instruments and financial resources in the amounts, at the times and on the
terms required to support the Company's future business; general industry and
market conditions and growth rates; and general U.S. and non-U.S. economic
conditions, including interest rate and currency exchange rate fluctuations.
15
You should not unduly rely on such forward-looking statements when
evaluating the information presented herein. These statements should be
considered only after carefully reading this entire Form 10-Q and the documents
incorporated herein by reference.
The following discussion and analysis addresses the Company's results of
operations and financial condition and should be read in conjunction with the
Company's condensed consolidated unaudited Financial Statements and Notes
thereto appearing in Part I, Item 1 in this Form 10-Q, and the Company's audited
Consolidated Financial Statements listed in Part II, Item 7 and the Notes
thereto appearing in the Company's 2001 Annual Report on Form 10-K.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
2002 AND MARCH 31, 2001
The following table represents the sales for each segment and its related cost
of services for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS
MARCH 31 ENDED MARCH 31
-------------------------- -----------------------------
2002 2001 2002 2001
NET NET COSTS OF COSTS OF
SALES SALES % CHANGE SERVICES SERVICES % CHANGE
----------- ----------- -------- ---------- ---------- ---------
Physical Therapy and
Rehabilitation Services $ 2,853,000 $ 2,667,000 7.0 $1,804,000 $1,573,000 14.7
Pharmacy Services 1,790,000 1,331,000 34.5 1,513,000 1,058,000 43.0
----------- ----------- ---------- ----------
Total Services Businesses 4,643,000 3,998,000 16.1 3,317,000 2,631,000 26.1
----------- ----------- ---------- ----------
Technology 329,000 246,000 33.7 572,000 643,000 (11.0)
----------- ----------- ---------- ----------
Total $ 4,972,000 $ 4,244,000 17.2 $3,889,000 $3,274,000 18.8
=========== =========== ========== ==========
NET SALES
Net sales for the three months ended March 31, 2002 increased by
approximately 17.2% when compared to the three months ended March 31, 2001. The
net sales increase was a result of an increase in the physical therapy and
rehabilitation services segment of approximately $186,000, an increase in the
pharmacy services segment of $459,000, and an increase in the technology segment
of approximately $83,000.
The increase in the sales for the physical therapy and rehabilitation
services segment was a result of internal growth by opening new clinics
subsequent to March 31, 2001 and the closing of certain clinics that were
unprofitable. The increase was offset by the sale of the physician practice in
January 2001 and the sale of the chiropractic practice in 2002. The combined
sales, generated by the disposition of these two practices, for the three months
ended March 31, 2001 was $352,000.
The increase in sales from our pharmacy services segment resulted from an
increase in services and the expansion of the customer base.
16
In the technology segment, the Company's sleep disorder revenue increased
as a result of an increased number of patients served and was offset by a
reduction in the Company's technology equipment sales.
COST OF SERVICES
Excluding the disposal of the two former subsidiaries in January 2002 and
2001, the increase in cost of services relating to the physical therapy and
rehabilitation services segment is consistent with the corresponding increase in
revenue for such segment because of the increased number of operating locations
and resulted in a corresponding increase in direct operating costs such as
salaries, rent and supplies.
The cost of services relating to the pharmacy segment increased in direct
relationship to the increase in revenue due to the hiring of additional
personnel to support the internal growth.
The cost of services for the technology segment for the three months ended
March 31, 2002, decreased by approximately 11% as compared to the same period
last year. The decrease is a direct result of the Company's cost management
program focusing on internal and customer support costs and the cost of
equipment sold. The Company has reduced these costs even further during the
second quarter of 2002.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three months ended
March 31, 2002 increased by approximately $2,975,000 or 107.7% compared with the
same period last year. The increase is due to increased rent expense, additional
severance pay due to various reductions in personnel during February and March
2002, an increase in legal fees, and general operating expenses for our foreign
entities that were not in existence during the quarter ended March 31, 2001 and
additional allowance on the funds being held by Medicare which is a one-time
charge. The Company has taken steps to reduce these costs even further during
the second quarter of 2002 and will continue to monitor all expenditures.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 2002
decreased by approximately $2,435,000 or 71.3% when compared to the same period
last year. The decrease was due to the reduction in expenditures for the
development of new products that were completed in the fourth quarter of 2001.
The Company expects that these costs will continue to decrease substantially by
December 31, 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased during the three months ended March
31, 2002 by $23,000 as compared to the same period last year. The decrease is
due to the Company implementing FASB 141/142, which requires no amortization to
be taken on goodwill.
LITIGATION AND LEGAL SETTLEMENT COSTS
During the three months ended March 31, 2002, the Company has accrued
$960,000 for litigation expenses and was offset by $873,000 from the settlement
of certain other litigation.
17
OTHER INCOME (EXPENSE)
During the three months ended March 31, 2002, interest income decreased to
$160,000 compared to $644,000 for the three months ended March 31, 2001, a
decrease in available cash for investment purposes.
During the three months ended March 31, 2002, interest expense increased to
$446,000 compared with $53,000 for the three months ended March 31, 2001,
primarily due the Company's issuance of $10,000,000 of subordinated debentures
in May 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its growth from the sale of equity
securities and convertible debentures. In 2002 and 2001, the Company raised
approximately $5,000,000 and $11,500,000, respectively, through private debt and
equity offerings, which the Company is using for acquisitions and joint
ventures, research, development, engineering, marketing and working capital
purposes. The Company's working capital requirements will continue to be
significant through 2002 as the Company continues to eliminate a number of the
financial and legal legacy issues incurred prior to 2002. The Company had a
working capital deficit of approximately $5,703,000 as of March 31, 2002.
Historically, the Company has expended significant amounts to develop its
technology segment, including joint venture relationships, introduction into the
international market segment and increasing its research and development and
administrative costs. In the first and second quarters of 2002, the Company has
taken steps to significantly reduce operating costs and substantially increase
unit gross margins on hardware sold. The Company's overall monthly operating
expenses exceed its cash revenues by approximately $1,250,000 for the first
quarter of 2002; a reduction of 50% over 2001. If the Company's revenues do not
increase in the near term, the Company's losses will continue and its available
capital will diminish further. The physical therapy and rehabilitation and
pharmacy segments are cash flow positive and provide funds to support a portion
of the technology business' negative cash flow. The portion of the technology
business' expenditures not funded internally and the corporate expenditures are
currently being funded through private sales of securities. In addition, on
April 12, 2002, the Company entered into an agreement with investors for an
additional $10,000,000 - $15,000,000 of capital. Funding of this amount is
contingent upon the Company achieving certain milestones. There can be no
assurances that the Company will achieve these milestones or, if not achieved,
that the investors will continue to fund the Company's working capital and
operating cash flow deficiencies.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations, to obtain additional
financing, and ultimately, to attain successful operations. The Company is in
the process of seeking funding in addition to the amounts discussed above and
executing further cost reductions that will enable it to meet its funding and
related commitments. There can be no assurances that such efforts will be
successful or will be sufficient to meet the Company's working capital
requirements through December 31, 2002.
Our future capital requirements will depend on numerous factors, including
growth and strategies for the services businesses, the rate of acceptance of our
EHC(TM) Units in the market, our ability to deliver increasing quantities of
products and achieve commercially acceptable gross profits, our ability to
achieve services top and bottom line growth and our
18
ability to control expenses. The timing and amount of working capital
requirements cannot be accurately predicted. The Company expects losses to
continue through 2002, although at a substantially reduced rate.
In January 2002, the Company issued an 8% debenture in the amount of
$172,200, which was satisfied on April 23, 2002. The debenture was
collateralized by a pledge of 400,000 shares of the Company's common stock owned
by a former officer and director.
In March 2002, the Company entered into a term sheet with an investor (the
"Lender") whereby the Company may borrow up to $5,000,000 in exchange for senior
convertible promissory note(s) (the "Convertible Notes"). The Convertible Notes
have a 12-month term and requires interest at 10% per annum, increasing to 15%
retroactively upon default. At the election of the Lender, both principal and
interest are convertible into the Company's common stock at 85% of the closing
bid price on the day prior to conversion, but in no event less than $0.30 per
share or more than $1.25 per share. The Company issued warrants to purchase
250,000 shares of common stock at $0.75 per share, exercisable within 24 months
for each $2,500,000 funded by the Lender. The Company is also liable for a
commission (payable in cash and warrants) and the Lender's legal fees in
connection with review of the transactional documents and closing of the
transaction. All of the underlying shares, whether through conversion of the
Convertible Notes or exercise of the warrants, have registration rights. As of
May 8, 2002, the Company has issued the Convertible Notes for the entire
$5,000,000 under this commitment as described in the following three paragraphs.
The Company received $900,000 (less fees of $100,000) for working capital
purposes and issued a $1,000,000 60-day promissory note dated January 22, 2002
to Dynamic Holdings Corporation and its principal (the "Note"). The note was due
on March 22, 2002 and interest was due on the unpaid principal balance at the
rate of 8% per annum. The Company refinanced the Note without penalty by issuing
a $1,250,000 convertible promissory note dated April 5, 2002 ("Dynamic Note")
which is part of the $5,000,000 commitment discussed above. The Dynamic Note is
secured by the outstanding balance of that certain $3,225,000 promissory note
dated October 31, 2000, given by Outreach Programs, Inc. to the Company in
exchange for the sale of 100% of the stock in Carolina Rehab, Inc.
The Company received $228,000 (less fees of $2,000) for working capital
purposes and issued a $230,000 10-day promissory note dated February 25, 2002 to
Dynamic Holdings Corporation. Interest on the unpaid principal balance accrues
at the rate of 8% per annum. This note was satisfied through an offset against
amounts borrowed under a $1,250,000 convertible promissory note issued to
Manford Investments, LLC (an affiliate of Dynamic Holdings and C.C. Fortune
Ventures, LLC) dated April 4, 2002 (the "Manford Note"). The Manford Note is
part of the $5,000,000 commitment discussed above.
The Company received $2,500,000 (less fees of $150,000) for working capital
purposes and signed a $2,500,000 senior convertible promissory note dated as of
March 7, 2002 with C.C. Fortune Venture, LLC which is part of the $5,000,000
commitment discussed above.
The cash flow of the services subsidiaries are subject to the reimbursement
for services rendered from the government, private insurance companies, and
directly from patients. If the government or private insurance carriers reduce
or delay the payments, this may have a negative effect on our liquidity.
19
The Nasdaq Stock Market, Inc. ("Nasdaq") has notified the Company that on
February 20, 2002, the price of the Company's common stock had closed for the
previous 30 consecutive trading days below the minimum $1.00 per share
requirement under its Marketplace Rules. Consequently, the Company has at least
until May 21, 2002 to regain compliance or appeal any delisting determination
made by Nasdaq's listing qualifications panel. The Company may also apply for a
transfer of its common stock listing to the Nasdaq SmallCap Market, which has an
extended grace period in which to satisfy the listing requirements for the
Company's securities. If the Company submits a transfer application and pays the
applicable SmallCap Market listing fees by May 21, 2002, initiation of the
delisting proceedings will be stayed pending Nasdaq's review of the application.
If the application is approved, the Company will have until August 19, 2002 to
regain compliance under the Nasdaq Marketplace Rules. An additional 180-day
grace period may be applicable; provided that the Company meets the initial
listing criteria for the SmallCap Market under the Marketplace Rules. The
Company may be eligible to transfer back to the Nasdaq National Market if by
February 17, 2003 it regains compliance in accordance with the Nasdaq
Marketplace Rules. At this time, the Company believes that it qualifies for
initial listing for the SmallCap Market.
Pursuant to the terms of a private equity line agreement, we may issue up
to $30,000,000 of shares of our Common Stock to Strategic Investment Management,
SA at a price equal to approximately 85% of the market price of the Common Stock
based upon a particular formula for "putting" the stock to SIM. By raising
additional funds and issuing additional common shares under the private equity
line, our stockholders may experience dilution.
The Company has the ability to draw down funds from the private equity line
subject to the terms and conditions of the equity line agreement. The amount
that the Company will be able to draw down is dependent on the Company's stock
price and volume. If the stock price decreases, this will require the Company to
issue more shares (and vice versa) and if the trading volume decreases, then the
amount of shares to be put will be minimized, thus limiting the amount of
funding (and vice versa).
In April 2002, the Company borrowed $75,000 at 8% per annum from its
current Chief Executive Officer and President for working capital purposes under
a 30-day promissory note. On April 25, 2002 this note was paid in full.
Except as discussed above, we have no commitments for additional financings
or borrowings. We can provide no assurance that additional debt or equity
financing will be completed, and if completed, will be on favorable terms. Lower
than expected earnings resulting from adverse conditions or otherwise, could
restrict our ability to expand our operations, or otherwise fully execute our
business plan. Management will explore all available alternatives to preserve
our business operations.
Cash used in operating activities was $4,006,000 and $7,303,000 for the
three months ended March 31, 2002 and 2001, respectively. The decrease of 45.2%
was primarily a result of an increase in accruals for settlement of various
litigation, a loss from the sale of Southeast Medical, an increase in provision
for doubtful accounts, and amortization of beneficial conversion feature and
discount.
Cash provided by investing activities was $445,000 for the three months
ended March 31, 2002 compared to $769,000 for three months ended March 31, 2001.
The decrease was primarily a result of repayments of loaned amounts during the
first quarter of 2002 and sale of Southeast Medical.
20
Cash provided by financing activities was $3,130,000 and $207,000 for the
three months ended March 31, 2002 and 2001, respectively. The increase was
primarily due to funds received in 2002 from direct sales of the Company's
common stock and from the issuance of convertible subordinated debentures and
various other promissory notes.
Total assets as of March 31, 2002 decreased to $27,908,000 or 10.6% from
December 31, 2001. This decrease was attributable to a reduction in cash as a
result of working capital requirements and the transfer of Southeast Medical.
Total cash and cash equivalents as of March 31, 2002, decreased to $262,000 from
$693,000, as of December 31, 2001.
Total liabilities as of March 31, 2002 increased $3,073,000 or 14.8% from
December 31, 2001. This increase is primarily due to the issuance of
subordinated debentures in the amount of $1,500,000 and accruals for various
lawsuit liabilities.
Working capital deficiency, defined as current assets less current
liabilities increased by $3,547,000 from December 31, 2001, primarily resulting
from use of cash to fund operations, the accrual for various lawsuit liabilities
and an increase in the allowance for the receivables being held in escrow by
Medicare.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related contingent
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to revenues, bad debts, inventories, investments, income
taxes, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
REVENUE RECOGNITION
The Company generates revenue primarily from the provision of therapy and
related services, the sale of prescription drugs and, to a lesser extent, the
sale of technology related products and services. The Company recognizes revenue
when services have been rendered or delivery has occurred, the price of the
product or service is fixed or determinable and collectability is reasonably
assured.
The Company's subsidiaries bill Medicare and Medicaid for certain products
and services provided. Medicare and Medicaid reimbursements are recognized based
on allowable charges. The difference between the established billing rates and
contracted or anticipated reimbursement rates is recorded as a contractual
allowance and offset against net revenue. These revenues are subject to audit
and retroactive adjustment by the respective fiscal intermediaries.
21
ALLOWANCE FOR CONTRACTUAL ADJUSTMENTS
In order to reduce gross revenue to the estimated net realizable amount due
from certain third-party payors, the Company estimates an allowance for
contractual adjustments in the period the services are rendered. The allowance
for contractual adjustments is reviewed periodically and adjusted in future
periods as final settlements with third-party payors are determined.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts based on
historical collections of accounts receivable. The Company continually monitors
its accounts receivable balances and records a monthly estimate for amounts
determined to be uncollectible. This allowance is adjusted periodically for
actual amounts deemed uncollectible.
EXCESS AND OBSOLETE INVENTORY
The Company writes down excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future product life-cycles, product demand and market
conditions. If actual product life-cycles, product demand and market conditions
are less favorable than those projected by management, additional inventory
write-downs may be required.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144 -Accounting for the Impairment or Disposal of Long-Lived Assets (FASB
144), effective for fiscal years beginning after December 15, 2001. This
Statement supercedes (FASB 121) - Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. FASB 144 retains the
fundamental provision of FASB 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. The Company determined that for the
three months ended March 31, 2002, FASB 144 had no effect.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets".
SFAS 141 requires that all business combinations initiated after June 30, 2001
be accounted for under a single method - the purchase method. Use of the
pooling-of-interests method is no longer permitted. SFAS 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment upon initial adoption of the Statement and on an annual basis going
forward. The amortization of goodwill ceased upon adoption of SFAS 142 as of
January 1, 2002. The Company believes that the adoption of these standards will
have no material impact on its financial statements or results of operations
except for elimination of amortization of Goodwill of approximately $290,000 per
year.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2002, the Company had outstanding $11,500,000 aggregate
principal amount of convertible subordinated debentures. Based upon the closing
bid of the Company's common stock on March 31, 2002, of $0.25, as reported by
the National Market of Nasdaq, the fair value of the convertible subordinated
debentures was approximately $10,501,000.
The Company's exposure to market rate risk is limited to interest rate risk
and risks associated with the price of its common stock. The Company's interest
rate risk is limited, since most of the Company's borrowings are at fixed rates.
The Company is subject to risk relating to the price of its common stock since
the majority of the Company's working capital for 2002 will be derived from the
issuance of convertible subordinated notes and the sale of its common stock.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in litigation with various parties regarding matters
of dispute that have arisen in the normal course of business, the outcome of
which the Company cannot predict at this time. The Company anticipates that
there will not be a material impact on its financial condition or results of
operations from the outcomes of these legal actions, except as discussed in the
following paragraphs.
The Company has previously disclosed the 14 purported class action lawsuits
that were filed against CyberCare and certain of its executive officers alleging
violations of federal securities laws. These lawsuits were consolidated into a
single class action lawsuit by the United States District Court for the Southern
District of Florida on November 4, 2000. The Consolidated Amended Complaint
("Complaint") principally alleges that the Company and certain of its officers
and directors made misrepresentations or omissions regarding the development and
future sales forecasts of its Electronic HouseCall(R) system products and
revenues of its pharmacy division. On April 19, 2002, counsel for the parties
entered into a Memorandum of Understanding addressing the terms of a settlement
(the "Settlement"). The Settlement involves the payment of $3.1 million, to be
provided under an insurance policy, and the issuance by the Company of 5,000,000
shares of stock (subject to certain sale restrictions), without any admission of
liability by the Company. The Settlement is subject to definitive settlement
documents and approval by the court. As of March 31, 2002, the Company has
accrued $800,000 for this liability which is included in litigation and legal
settlement costs contained in the statement of operations.
Our Physical Therapy and Rehabilitation subsidiary ("PT&R") received a
letter from the Center for Medicare and Medicaid Services ("CMS") and its
intermediary in April 2001 notifying it of the suspension of Medicare payments.
CMS alleged that certain patient complaints, which constituted less than 1% of
PT&R's Medicare patients, and other alleged regulatory non-compliance, justified
the payment suspension. During the suspension, the Medicare program continued to
process PT&R's claims, but held payment in escrow. In August 2001, the
suspension was lifted and payment for processed claims was released although
approximately $1,115,000 remained held in escrow, pending further review. CMS
completed its review and issued its formal determination in April 2002. CMS
determined that approximately $1,191,000 in overpayment was made. Approximately
$76,100 in repayment is required (together with an offset of the amounts held in
escrow) to satisfy the overpayment. PT&R disputes the overpayment and is
submitting a rebuttal to CMS's determination. As of March 31, 2002, the Company
has recorded an allowance for the entire overpayment.
A complaint was filed against the Company on August 13, 2001, alleging that
the Company breached certain obligations in connection with the removal of a
restrictive legend from stock issued to the plaintiff. Mediation was held in
March 2002, which resulted in settlement of the dispute. The settlement requires
the Company to issue shares of common stock equal in value to $200,000 (to be
registered and valued at the time of filing a registration statement), transfer
of the Sleep Disorder Center (previously owned by the plaintiff) back to the
plaintiff, and make a cash payment, which the Company's insurance carrier has
agreed to cover of $200,000. Completion of the settlement is forthcoming,
pending finalization of settlement
24
documentation. As of March 31, 2002, the Company has accrued $200,000 for this
liability; of which $100,000 is included in litigation and legal settlement
costs contained in the statement of operations for the three months ended March
31, 2002 and $100,000 was accrued as of December 31, 2001.
A complaint was filed against the Company by IMRglobal (n/k/a CGI
Information Technology Services) on November 21, 2001 in the 6th Judicial
Circuit in and for Pinellas County, Florida, alleging that the Company breached
its obligations to make payment for software development services of $1,113,000.
A settlement has been reached whereby the Company has agreed to pay $150,000 and
issue 500,000 shares of its common stock to the plaintiff. The shares are to be
registered, but will be subject to certain sale restrictions.
In February 2002, an arbitration panel determined that the Company is
responsible for damages and attorneys' fees in connection with the Company's
performance under an option agreement. From inception, the Company believed
there was no merit to the claim and damages, if any, were covered under an
insurance policy. The insurer later asserted that an exclusion from coverage
applied. As part of the settlement reached at the mediation of the class action
litigation, the Company waived its claim against the insurer for the coverage
denial. On April 29, 2002 an Award of Arbitrators was issued for $1,114,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2002, the Company issued:
- 54,453 shares of its common stock, valued at $45,000, under the employee
stock purchase plan,
- 170,066 shares of its common stock, valued at $162,000, as partial
payment for interest owed on subordinated debentures,
- 116,666 shares of its common stock to two former executives for the
exercise of stock options on a cashless basis,
- 657,791 shares of its common stock, valued at $310,000, for payment of
certain outstanding accounts payable,
- 500,000 shares of its common stock, valued at $214,000, under the
private equity line, and
- 106,389 shares of its common stock, valued at $102,000, for its
contribution to the Company's retirement plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 2002, covered by this report on Form
10-Q, no matter was submitted to a vote of security holder
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ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On January 15, 2002, the Company filed a Current Report on Form 8-K/A (Item
5), which clarified certain terms of the private equity line.
On January 16, 2002, the Company filed a Current Report Form 8-K (Item 5)
regarding an amendment to the Marketing, Distribution and License Agreement
dated October 11, 2001 with CyberAmeriCare, Inc.
On February 11, 2002, the Company filed a Current Report on Form 8-K (Item
5) regarding the resignation of the Company's Chairman of the Board/Chief
Executive Officer, the appointment of an interim Chairman of the Board, and the
current President assuming the role of Chief Executive Officer.
On March 7, 2002, the Company filed a Current Report on Form 8-K (Item 5)
regarding the termination of the Marketing, Distribution and License Agreement
dated October 11, 2001 with CyberAmeriCare, Inc., the termination of the
Cooperative Development, Services, Licensing and Marketing Agreement with Health
Hero, and the notification from the NASDAQ Stock Market, Inc.
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SIGNATURES
In accordance with 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.
CYBERCARE, INC.
(Registrant)
May 15, 2002 By: /s/ Joseph R. Forte
------------ --------------------------------------------
(Date) Joseph R. Forte, Chief Executive Officer
and President
May 15, 2002 By: /s/ Dana Pusateri
------------ -----------------------------------
(Date) Dana Pusateri, Executive Vice President
May 15, 2002 By: /s/ Steven M. Cohen
------------ --------------------------------------------
(Date) Steven M. Cohen, Chief Financial Officer
May 15, 2002 By: /s/ Arthur Kobrin
------------ -----------------------------------
(Date) Arthur Kobrin, Treasurer
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