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 June 30, 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.
---------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0158479
------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2500 QUANTUM LAKES DRIVE, SUITE 1000, BOYNTON BEACH, FLORIDA 33426-8330
-----------------------------------------------------------------------
(Address of principal executive offices)
(561) 742-5000
----------------
(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
77,559,192 shares were outstanding as of July 31, 2002.
CYBERCARE, INC.
10-Q FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2002 (unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2002
and 2001 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 30
2
CYBERCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
2002 2001
--------- -----------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 38 $ 693
Cash - restricted 277 373
Trade accounts receivable, less allowance for doubtful accounts of
$1,976 (2002) and $1,859 (2001) 2,567 4,293
Inventories, net 2,953 2,599
Notes receivable - related parties, less allowance to reduce to realizable
value of $687 (2002) and $604 (2001) 129 228
Notes and interest receivable 918 1,164
Other current assets 389 867
--------- ---------
Total current assets 7,271 10,217
Property and equipment, net 2,058 2,439
Goodwill, net 4,563 5,085
Licenses, net 9,347 9,992
Notes receivable 2,584 2,455
Other assets 1,069 1,041
--------- ---------
Total assets $ 26,892 $ 31,229
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,659 $ 3,015
Accrued liabilities 5,849 5,724
Current portion of notes payable and long-term debt 150 85
Lines of credit 1,419 974
Convertible subordinated debentures, net of discounts of $35 5,465 --
Net liabilities of discontinued operations 1,689 1,660
Deferred revenue 32 746
Other current liabilities 159 169
--------- ---------
Total current liabilities 17,422 12,373
Convertible subordinated debentures, net of discounts of $1,525 (2002) and
$1,924 (2001) 8,475 8,076
Notes payable and long-term debt, net of current portion 56 --
Other liabilities 198 361
--------- ---------
Total liabilities 26,151 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;
77,334,081 and 67,827,992 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively 193 170
Capital in excess of par 129,533 127,055
Stock subscription receivable (4,740) (4,740)
Accumulated deficit (124,245) (112,066)
--------- ---------
Total stockholders' equity 741 10,419
--------- ---------
Total liabilities and stockholders' equity $ 26,892 $ 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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues $ 4,912 $ 4,704 $ 9,884 $ 8,948
------------ ------------ ------------ ------------
Costs and expenses:
Cost of services 4,077 3,383 7,966 6,579
Selling, general and administrative 3,632 3,550 9,370 6,391
Research and development 706 4,314 1,688 7,731
Depreciation and amortization 517 555 1,048 1,109
Litigation and legal settlement costs -- -- 87 --
Loss (gain) on sale of subsidiaries 238 -- 753 (92)
------------ ------------ ------------ ------------
Total costs and expenses 9,170 11,802 20,912 21,718
------------ ------------ ------------ ------------
Operating loss (4,258) (7,098) (11,028) (12,770)
Other income (expense):
Interest income 184 272 344 916
Interest expense (619) (24) (1,065) (77)
Amortization of beneficial conversion feature & discount (239) (108) (460) (108)
Other income 16 4 30 60
------------ ------------ ------------ ------------
Total other income (expense) (658) 144 (1,151) 791
------------ ------------ ------------ ------------
Loss from continuing operations (4,916) (6,954) (12,179) (11,979)
Estimated loss on disposal of discontinued business -- (950) -- (950)
------------ ------------ ------------ ------------
Net loss $ (4,916) $ (7,904) $ (12,179) $ (12,929)
============ ============ ============ ============
Loss per common share - basic and diluted:
Loss from continuing operations $ (0.07) $ (0.11) $ (0.17) $ (0.18)
Discontinued operations -- (0.01) -- (0.02)
------------ ------------ ------------ ------------
Net loss $ (0.07) $ (0.12) $ (0.17) $ (0.20)
============ ============ ============ ============
Weighted average shares outstanding 73,026,007 64,894,503 70,793,253 64,849,475
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
4
CYBERCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
-------- --------
Cash Flows from Operating Activities:
Net loss $(12,179) $(12,929)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 403 325
Amortization 645 784
Provision for doubtful accounts 1,921 546
Amortization of beneficial conversion feature and discount 460 108
Loss from unconsolidated subsidiary 8 --
Loss on disposal of fixed assets 42 --
Common stock issued for services 6 53
Amortization of Deferred Loan Costs 119 --
Fair market value of stock options issued to directors 13 --
Common stock issued for interest 215 --
Common stock issued for settlement of lawsuits 1,000 --
Net liabilities of discontinued operations 29 (405)
Net assets of discontinued operations -- (351)
Estimated loss on disposal of discontinued business -- 950
Loss (gain) on sale of subsidiaries 753 (92)
Changes in operating assets and liabilities, net of effects of dispositions:
Trade accounts receivable (460) (2,324)
Inventories (354) (1,423)
Notes receivable and other current assets 780 (348)
Accounts payable (28) (601)
Accrued and other current liabilities (55) 923
-------- --------
Net cash used in operating activities (6,682) (14,784)
-------- --------
Cash Flows from Investing Activities:
Purchase of marketable securities -- (511)
Cash transferred upon sale of subsidiary (64) --
Proceeds from sale of marketable securities -- 1,011
Restricted cash 95 (365)
Repayment from related parties, net 9 1,144
Capital expenditures (152) (159)
Change in intangible, notes receivable and other assets 48 270
-------- --------
Net cash (used in) provided by investing activities (64) 1,390
-------- --------
Cash Flows from Financing Activities:
Other liabilities 202 (151)
Net borrowings under lines of credit 445 162
Proceeds from exercise of stock options and warrants -- 94
Proceeds from sale of common stock 214 --
Proceeds from sale of convertible subordinated debentures 5,230 10,000
-------- --------
Net cash provided by financing activities 6,091 10,105
-------- --------
Net decrease in cash and cash equivalents (655) (3,289)
Cash and cash equivalents at the beginning of period 693 15,231
-------- --------
Cash and cash equivalents at the end of period $ 38 $ 11,942
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 328 $ 132
======== ========
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 Six Months Ended
June 30, June 30,
2002 2001
------------ -----------
Fair market value of detachable warrants issued with convertible
subordinated debentures $ 46 $ 2,618
Beneficial conversion feature on convertible debentures 36 --
Common stock issued for payment of accounts payable 316 --
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 209 125
Common stock received as consideration for sale of subsidiary -- (692)
Common stock issued for payment of accrued interest 108 366
Common stock received in repayment of note receivable -- (183)
Common stock received in repayment of stock subscription receivable -- (65)
Common stock issued to purchase domain name -- 8
Common stock issued for stock subscription receivable -- 800
Common stock issued on Conversion of Notes Payable 175 --
Fair market value of options issued to Directors 13 --
Property and equipment included in other liabilities -- 568
The following is a summary of the significant non-cash amounts that resulted
from the Company's dispositions:
For the Six Months Ended
June 30, June 30,
2002 2001
------------- ------------
Assets disposed:
Accounts receivable $(471) $(196)
Property and equipment (88) (76)
Goodwill (522) (412)
Other assets 230 --
----- -----
Assets disposed (851) (684)
----- -----
Liabilities transferred:
Accounts payable 11 64
Accrued expenses and short-term debt 151 20
----- -----
Liabilities transferred 162 84
----- -----
Fair value of common stock issued 753 600
----- -----
Cash transferred upon dispositions $ (64) $ --
===== =====
6
CYBERCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1 - Organization and Summary of Significant Accounting Policies
Organization
CyberCare, Inc. ("CyberCare" or the "Company") is a holding company, which
consists primarily of service businesses including 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 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 provides enabling technology by
utilizing its intellectual property, including patented technology, to deliver
tele-health 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 condensed 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 six months ended June 30, 2002 of $12,179,000,
negative cash flow from operations of $6,682,000, a working capital deficiency
of $10,151,000 and certain loan covenant violations at June 30, 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. There can
be no assurances that such capital will be available to the Company on
acceptable terms, or at all.
Future Capital Needs
For the six months ended June 30, 2002 and for the year ended December 31,
2001, the Company incurred 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. In order for the Company to generate additional
needed cash flow, the Company is attempting to sell its physical therapy and
rehabilitation business, if an
7
agreement can be reached, the proceeds received from the sale will be used for
working capital purposes and reduction of existing liabilities. The Company may
also raise funds through the sale of its other non-tele-healthcare assets and is
seeking additional equity or debt financing. The Company is also continuing to
reduce its overall monthly cash burn rate and management 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. There is no assurance that the
Company will be able to sell the non-tele-healthcare businesses, reduce its
costs and expenses, or raise the necessary funds.
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 June 30, 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
inter-company transactions and balances have been eliminated in consolidation.
Recent Accounting Pronouncements
In June 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. SFAS 142 also requires us to complete a
transitional goodwill impairment test six months from the date of adoption.
The amortization of goodwill ceased upon adoption of SFAS 142 as of January
1, 2002. The Company has adopted these standards and has determined that
these standards currently do not have a material impact on its financial
statements or results of operations except for elimination of amortization of
Goodwill of approximately $280,000 per year. The Company completed the
transitional impairment test of goodwill and indefinite lived intangible
assets during the second quarter of 2002. Based upon the results of this
test, the Company determined that there was no impairment of goodwill or
indefinite lived intangible assets, regarding its subsidiary Pharmacy Care,
but a potential impairment of goodwill or indefinite lived intangible assets
may exist relative to its other two subsidiaries, Physical Therapy &
Rehabilitation and CyberCare Technology as of January 1, 2002. The amount of
the potential impairment will be determined and disclosed prior to December
31, 2002.
Disposal of Business
8
In August 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes FASB Statement 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 Accounting Principles Board (APB) Opinion No. 30,
REPORTING THE RESULTS OF OPERATIONS- REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS. The Company adopted the provisions of FASB Statement
No. 144 as of January 1, 2002.
NOTE - 2 Goodwill and Identifiable Intangible Assets
Intangible Assets and the related accumulated amortization, in thousands, and
amortization periods are set forth below:
JUNE 30, 2002
JUNE 30, 2002 DECEMBER 31, 2001 AMORTIZATION PERIODS (YEARS)
--------------- -------------------- ------------------------------
Licenses 12,905 12,906 10
Accumulated Amortization (3,558) (2,914)
------- -------
Licenses, net 9,347 9,992
======= =======
Goodwill 5,156 5,746
Accumulated Amortization (593) (661)
------- -------
Goodwill, Net 4,563 5,085
======= =======
The following reconciliation adjusts net income for amortization expense related
to goodwill that is no longer amortized under the provisions of FASB Statement
No. 142:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
-------------------- ----------------
(Unaudited, amounts in thousands, except
per share data)
Net loss $ (7,904) $(12,929)
Goodwill amortization, net of tax 68 138
-------- --------
Adjusted net loss (7,836) (12,791)
======== ========
Basic and Diluted earnings per share:
Net loss (0.12) (0.20)
Goodwill amortization .00 .00
-------- --------
Adjusted loss (0.12) (0.20)
======== ========
Basic 64,895 64,849
Diluted 64,895 64,849
9
NOTE 3 - Senior Secured Convertible Notes
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 note is secured by the Accounts
Receivable of CyberCare, a second position on the accounts receivable of the
Physical Therapy subsidiary, subject to the consent of the subsidiary's existing
lender, the furniture fixture and equipment of CyberCare and the Physical
Therapy Subsidiary, subject to any existing encumbrances, inventory of
CyberCare, and the proceeds and collateral securing such proceeds of the October
31, 2000 Promissory Note from Outreach Programs, Inc. 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
June 30, 2002, the warrants were valued at $53,000 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 had 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 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.
On June 2, 2002, the Company issued a $500,000 one-year Senior Secured
Convertible Note to Manford Investments LLC. At the election of Manford, both
the 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 $0.20 per share or more than $0.75 per share. The Company issued
warrants to purchase 90,000 shares of common stock at $0.75 per share,
exercisable within 24 months. As of June 30, 2002, the warrants were valued at
$8,000 using the Black-Scholes valuation method
NOTE 4 - 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:
10
JUNE 30,
2002 DECEMBER 31, 2001
--------------- -------------------
Component parts $1,979,000 $1,616,000
Work-in-process 29,000 29,000
Finished goods 945,000* 954,000
---------- ----------
$2,953,000 $2,599,000
========== ==========
* Included in finished goods as of June 30, 2002 is $480,000 of inventory
that has been shipped to Syzex and is the subject of certain litigation.
Inventory adjusted for the Syzex owned inventory is $2,473,000, with finished
goods inventory of $465,000.00
NOTE 5 - Dispositions
Effective December 3, 2001, the Company and the operating subsidiaries
comprising its air ambulance business ("Air") entered into a transaction with
Aim Aircraft ("Aim") 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. The Company retained ownership
of the aircraft and remains liable for approximately $13,700,000 of the aircraft
financing. As part of the transaction, Aim leased certain of these aircraft.
On December 17, 2001, the Company received an independent appraisal on the
leased airplanes. At that date, the average market value of all the planes was
$13,576,000 with a suggested sale price of $13,832,000.
Due to the Company's current financial situation, the Company is
unable to expend resources to maintain the aircraft in accordance with the lease
agreement with Aim and fund the required debt service. The Company has been
notified by the aircraft lender that the Company is in violation of the loan
agreements. The company has voluntarily surrendered the aircraft to the lender.
As of June 30, 2002, the Company had $1,268,000 accrual for the estimated future
operating losses of Air. Based on this information and a proposal made by the
Company to Textron (the lender) as full satisfaction, the Company does not
believe an additional reserve is needed for the payment of the leases at this
time.
For financial accounting purposes, a sale will not be recognized until the
Company sells the aircraft and/or 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.
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 $514,000 from this transaction during the first
quarter of 2002.
11
SLEEP DISORDER CENTER - As part of a settlement of certain litigation,
effective May 1, 2002, the Company transferred all of the assets of Tallahassee
Sleep Disorder Center to its original owner for no consideration. The Company
recognized a loss on the transfer of this subsidiary of approximately $239,000
from this transaction during the second 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 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.
SIX MONTHS ENDED JUNE 30,
2002 2001
--------------- --------------
Revenue $ 9,484,000 $ 7,931,000
Net loss $(11,492,000) $(13,135,000)
Net loss per common share (basic and diluted) $ (0.16) $ (0.20)
NOTE 6 - 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 is currently unable to predict the financial impact of litigation at
this time.
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 June 30, 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. $76,100 was
repaid. PT&R disputes the overpayment and is submitting an appeal to CMS's
determination. As of June 30, 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. Pursuant to
12
the settlement, the Company issued and registered 869,566 shares of common
stock, transferred the assets of the Sleep Disorder Center (previously owned by
the plaintiff) back to the plaintiff, and made a cash payment, which the
Company's insurance carrier covered, in the amount of $200,000.
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 was reached and the Company paid $150,000 and issued 500,000 shares
of its common stock to the plaintiff. The shares were registered, and are
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 and on June 17,
2002, a final judgment was issued for $1,114,000 plus interest, of which the
entire amount was reserved as of June 30, 2002.
A complaint was filed against the Company by Health Hero Network, Inc. on
May 31, 2002 in the Superior Court of California in and for the County of Santa
Clara, alleging that the Company breached its obligations to make payments for
product development services of $450,000 and seeking additional damages of
$3,388,750. The Complaint was served on July 25, 2002 and a separate demand for
arbitration, with the American Arbitration Association, was served on the
Company on July 24, 2002. The Company is investigating this matter and will
respond to the complaint and demand for arbitration after such investigation is
complete. The Company believes the claims lack merit and intends to vigorously
defend this suit.
The Company is in litigation with a previous employee based upon
termination of the employee's employment contract. The Company has accrued its
best estimate as of June 30, 2002 for this liability.
CONTINGENCIES
The Nasdaq Stock Market, Inc. ("Nasdaq") 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. In May, 2002, the Company transferred
its common stock listing to the Nasdaq SmallCap Market, which provided an
extended grace period in which to satisfy the listing requirements for the
Company's securities. The Company has 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.
On August 2, 2002, Nasdaq responded to an inquiry by the company regarding
a deficiency in outside directors supporting the Company Audit Committee
activities. Nasdaq agreed that the Company was not in compliance and needed to
remedy the situation. The Company is in the process of adding additional outside
directors and has until August 19, 2002 to remedy the deficiency. The Director
issue was due on August 16, 2002, but was combined as one requirement by Nasdaq
and the Company has until August 19, 2002 to respond.
On August 16, 2002, the Company communicated with Nasdaq on the deficiency
issues and Nasdaq indicated that the Company has until August 19, 2002 to
respond on both issues. The Company believes its common stock will be listed on
the Over the Counter (OTC) Bulletin Board, if it does not maintain its Nasdaq
listing.
NOTE 7 - Related Party Transactions
During the second quarter of 2002, the Chief Executive Officer and
President of the Company loaned the Company $250,000 for working capital
purposes. The loans bore interest at 8%. The loans was secured by the accounts
receivable of the Pharmacy business. As of June 30, 2002, the Company has repaid
the amounts in full.
NOTE 8 - Note Payable
On June 26, 2002, the Company received $125,000 from Manford Investments
LLC under a promissory note which bears interest at 8% per year for working
capital purposes. The term was for 30 days and is currently still outstanding.
The note is included in the current portion of notes payable and long-term debt
as of June 30, 2002.
NOTE 9 - Changes in Stockholders' Equity
During the three months ended June 30, 2002, the Company issued:
. 440,000 shares of its common stock, valued at $182,000, in repayment
of a loan,
. 6,369,566 shares of its common stock, valued at $1,090,000, for
settlement of various lawsuits,
13
. 469,781 shares of its common stock, valued at $162,000, as partial
payment for interest owed on convertible subordinated debentures, and
. 621,377 shares of its common stock, valued at $125,000, for payment of
certain outstanding accounts payable.
NOTE 10 - 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 Accounting 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 inter-company 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 June 30, 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 and six months ended June 30, 2002 and 2001 are as
follows:
FOR THE THREE MONTHS PHYSICAL THERAPY
ENDED JUNE 30, 2002 AND REHABILITATION PHARMACY TOTAL SERVICES TECHNOLOGY OTHER CONSOLIDATED
-------------------- ------------------ -------- -------------- ---------- ----- ------------
Net revenues $ 2,740,000 $ 2,001,000 $ 4,741,000 $ 171,000 $ -- $ 4,912,000
Loss from continuing
operations (84,000) (215,000) (299,000) (2,360,000) (2,257,000) (4,916,000)
Total assets $ 3,823,000 $ 2,406,000 $ 6,229,000 $ 14,573,000 $ 6,090,000 $ 26,892,000
FOR THE THREE MONTHS PHYSICAL THERAPY
ENDED JUNE 30, 2001 AND REHABILITATION PHARMACY TOTAL SERVICES TECHNOLOGY OTHER CONSOLIDATED
-------------------- ------------------ -------- -------------- ---------- ----- ------------
Net revenues $ 2,645,000 $ 1,689,000 $ 4,334,000 $ 370,000 $ -- $ 4,704,000
Loss from continuing
operations (30,000) (56,000) (86,000) (6,157,000) (711,000) (6,954,000)
Total assets $ 5,948,000 $ 2,423,000 $ 8,371,000 $ 20,199,000 $ 28,409,000 $ 56,979,000
FOR THE SIX MONTHS
ENDED JUNE 30, 2002
-------------------
Net revenues $ 5,593,000 $ 3,791,000 $ 9,384,000 $ 500,000 $ -- $ 9,884,000
Loss from continuing
operations (484,000) (272,000) (756,000) (4,759,000) (6,664,000) (12,179,000)
FOR THE SIX MONTHS
ENDED JUNE 30, 2001
-------------------
Net revenues $ 5,312,000 $ 3,020,000 $ 8,332,000 $ 616,000 $ -- $ 8,948,000
(Loss) income from
continuing operations 533,000 (218,000) (315,000) (11,515,000) (779,000) (11,979,000)
14
NOTE 11 - Subsequent Events
On August 15, 2002 the company finalized a definitive agreement with C.C.
Fortune Venture, LLC to borrow $2,000,000 (less commissions paid in cash of
$120,000), for working capital purposes, in exchange for a senior convertible
promissory note. The Convertible note has a 24-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 $.10 per share. The company issued warrants to purchase 400,000
shares of common stock at $.20 per share exercisable within 36 months. The note
is secured by 100% of the issued and outstanding shares of stock of CyberCare
Technologies, Inc. All of the underlying shares, whether through conversion of
the Convertible Note or exercise of the warrants, have registration rights. As
of August 19, 2002 only $500,000 of this note has been funded.
15
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.
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.
16
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2002 and 2001
The following table represents the sales for each segment and its related cost
of services for the periods indicated:
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------------- --------------------------
2002 2001 2002 2001
NET NET COSTS OF COSTS OF
REVENUE REVENUE % CHANGE SERVICES SERVICES % CHANGE
------------ ------------ --------- ----------- ----------- ---------
Physical Therapy and
Rehabilitation Services $2,739,000 $2,645,000 3.6 $1,805,000 $1,646,000 9.7
Pharmacy Services 2,002,000 1,689,000 18.5 1,650,000 1,380,000 19.6
---------- ---------- ---------- ----------
Total Services Businesses 4,741,000 4,334,000 9.4 3,455,000 3,026,000 14.2
---------- ---------- ---------- ----------
Technology 171,000 370,000 (53.8) 622,000 357,000 74.2
---------- ---------- ---------- ----------
Total $4,912,000 $4,704,000 4.4 $4,077,000 $3,383,000 20.5
========== ========== ========== ==========
NET REVENUE
Net revenue for the three months ended June 30, 2002 increased by
approximately 4.4% when compared to the three months ended June 30, 2001. The
net revenue increase was a result of an increase in the physical therapy and
rehabilitation services segment of approximately $95,000, an increase in the
pharmacy services segment of $312,000, and offset by a decrease in the
technology segment of approximately $199,000, primarily due to the transfer of
the Sleep Disorder Center.
The physical therapy and rehabilitation services segment, excluding the
physician practice and chiropractic practice which were sold in January 2001 and
January 2002 respectively, had an increase in revenue of approximately $327,000
for the three months ended June 30, 2002 over the same period last year. The
increase was a result of internal growth by opening new clinics subsequent to
June 30, 2001 offset by the closing of certain clinics that were unprofitable.
During the three months ended June 30, 2002, as part of the potential sale of
the entity, the Company has delayed opening new clinics until after the closing.
Due to the sale of the chiropractic practice on January 7, 2002, no
revenue is reflected in the 2002 financial statements, but for the six months
ended June 30, 2001, the practice generated approximately $233,000 of revenue.
The increase in revenue from our pharmacy services segment resulted from
an increase in services and the expansion of the customer base.
The technology segment revenue (EHC related revenue), excluding the
Company's Sleep Disorder Center transferred in May 2002 to the previous owner,
decreased by approximately $54,000.
From April 1, 2002 through May 1, 2002 (the date of transfer), the Sleep
Disorder Center generated approximately $110,000 of revenue as compared to
approximately $254,000 of revenue generated during the three months ended June
30, 2001.
17
COST OF SERVICES
Costs of services for the three months ended June 30, 2002 increased by
approximately 20.5% when compared to the three months ended June 30, 2001. The
cost of services increase was a result of an increase in the physical therapy
and rehabilitation services segment of approximately $159,000, an increase in
the pharmacy services segment of $270,000 and an increase in the technology
segment of approximately $265,000.
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 and other planned growth which did not occur due to
cash constraints. There was an increase in direct operating costs such as
salaries, rent and supplies due to the increased number of operating locations.
The cost of services relating to the pharmacy segment increased due to the
hiring of additional full-time and contract personnel to support the internal
growth, an increase in the cost of the pharmaceutical drugs purchased due to
price increases and the Company's cash situation.
The cost of services for the technology segment for the three months ended
June 30, 2002, increased by approximately 74.2% as compared to the same period
last year. The increase was a direct result of an increase in the cost for
network services of approximately $282,000. Also, for the three months ended
June 30, 2001, $696,000 of costs classified as costs of services, which were
related to product development and technology were allocated to Research and
Development. This allocation was consistent with prior quarters accounting. In
2002, no allocation was necessary due to the completion of internal development
of prototype units in the fourth quarter of 2001. This increase was partially
offset by the direct result of the Company's cost management program focusing on
internal and customer support costs and the cost of equipment sold.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three months ended
June 30, 2002 increased by 2.3% as compared to the three months ended June 30,
2001 primarily due to the inclusion of certain costs amounting to approximately
$1,490,000 allocated to research and development for the technology entity for
the three months ended June 30, 2001, which was consistent with previous
quarters reporting. These costs were related to product development and
technology. In 2002 this allocation was not necessary due to the completion of
internal development of prototype units in the fourth quarter of 2001. The
increase, relative to the prior year allocation, was offset by decreases in
payroll, contract labor and professional fees. The Company is taking further
steps to reduce costs and will continue to monitor all expenditures.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June 30, 2002
decreased by approximately $3,608,000 or 83.7% when compared to the same period
last year. The decrease was due to the allocation of certain Cost of Services
and Selling, General and Administrative costs in 2001 to Research and
Development relating to the development of new products. These costs amounted to
approximately $2,186,000 for the three months ended June 30, 2001. The new
products were completed in the fourth quarter of 2001, and therefore, no
allocation was necessary in 2002. The Company expects that other Research and
Development costs will begin to level off as we enter the third quarter of 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased, in total, during the three months
ended June 30, 2002 by $38,000 as compared to the same period last year.
Amortization of goodwill decreased $68,000 due to the Company implementing FASB
141/142, which requires no amortization to be taken on goodwill
18
OTHER INCOME (EXPENSE)
During the three months ended June 30, 2002, interest income decreased to
$184,000 compared to $272,000 for the three months ended June 30, 2001, a
decrease in available cash for investment purposes.
During the three months ended June 30, 2002, interest expense increased to
$619,000 compared with $24,000 for the three months ended June 30, 2001,
primarily due the Company's issuance of the senior secured convertible notes and
convertible subordinated debentures required to fund the ongoing operations of
the business in 2002 and 2001.
During the three months ended June 30, 2002, amortization of beneficial
conversion feature and discount increased to $239,000 compared with $108,000 for
the three months ended June 30, 2001 primarily due to the Company's issuance of
the senior secured convertible notes in 2002.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
2002 AND 2001
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------------- ---------------------------
2002 2001 2002 2001
NET NET COSTS OF COSTS OF
REVENUE REVENUE % CHANGE SERVICES SERVICES % CHANGE
------------ ------------ ----------- ------------ ------------ ---------
Physical Therapy and
Rehabilitation Services $5,592,000 $5,312,000 5.3 $3,609,000 $3,140,000 14.9
Pharmacy Services 3,792,000 3,015,000 25.8 3,163,000 2,438,000 29.7
---------- ---------- ---------- ----------
Total Services Businesses 9,384,000 8,327,000 12.7 6,772,000 5,578,000 21.4
---------- ---------- ---------- ----------
Technology 500,000 621,000 (19.5) 1,194,000 1,001,000 19.3
---------- ---------- ---------- ----------
Total $9,884,000 $8,948,000 10.5 $7,966,000 $6,579,000 21.1
========== ========== ========== ==========
NET REVENUE
Net revenue for the six months ended June 30, 2002 increased by
approximately 10.5% when compared to the six months ended June 30, 2001. The
increase was a result of an increase in the physical therapy and rehabilitation
services segment of approximately $281,000, an increase in the pharmacy services
segment of $771,000, and offset by a decrease in the technology segment of
approximately $116,000, primarily due to the disposition of the Sleep Disorder
Center.
The physical therapy and rehabilitation services segment, excluding the
physician practice and chiropractic practice, increased approximately $866,000
for the six months ended June 30, 2002 as a result of internal growth by opening
new clinics subsequent to June 30, 2001, offset by the closing of certain
unprofitable clinics. During the six months ended June 30, 2002, as part of the
potential sale of the entity, the Company has delayed opening any new clinics
until after the closing, which impacted projected revenue and earnings growth.
The increase in revenue during the six months ended June 30, 2002 as
compared to 2001 for the physical therapy and rehabilitation segment was offset
by the sales of the physician practice (January 2001) and chiropractic center
(January 2002) which generated total revenue of approximately $586,000 for the
six months ended June 30, 2001.
The increase in revenue from our pharmacy services segment resulted from
an increase in services and the expansion of the customer base.
19
The technology segment, excluding the Sleep Disorder Center, had a
decrease in revenue of $86,000.
The Sleep Disorder Center had a decrease in revenue of approximately
$35,000 because the current year's revenue was only generated during a portion
of the six-month period ended June 30, 2002 compared to the full six- month
period in 2001.
COST OF SERVICES
Cost of services for the six months ended June 30, 2002 increased by
approximately $1,387,000 or 21.1% when compared to the six months ended June 30,
2001. The cost of services increase was a result of an increase in the physical
therapy and rehabilitation services segment of approximately $469,000, an
increase in the pharmacy services segment of $725,000 and an increase in the
technology segment of approximately $193,000.
The physical therapy and rehabilitation services segment, excluding the
cost related to the physician and chiropractic practices, had an increase in the
cost of services of approximately $723,000 which is consistent with the
corresponding increase in revenue from such segment and other planned growth
which did not occur due to cash constraints. There was a corresponding increase
in direct operating costs such as salaries, rent, and supplies due to the
increased number of operating locations
The physician and chiropractic practices were sold in January 2001 and
2002 respectively, therefore the June 2002 financial statements do not include
any activity from these entities. During the six months in 2001, the financial
statements include cost of services of approximately $254,000.
The cost of services relating to the pharmacy segment increased due to the
hiring of additional full-time and contract personnel to support the internal
growth and higher costs relative to the purchase of prescription drugs.
The technology segment, excluding the Sleep Disorder Center subsidiary,
increased its cost of services during the six months ended June 30, 2002 as
compared to the six months ended June 30, 2001 by approximately $193,000. The
increase was a direct result of an increase in the costs due to the start-up
activity required to initiate the outsourcing agreement with IBM for network
services of approximately $322,000 and the inclusion of costs classified as
costs of services, which were related to product development and technology,
which were allocated to Research and Development. This allocation was consistant
with prior quarters accounting, and amounted to approximately $1,414,000 for the
six months ended June 30, 2001. In 2002 no allocation was necessarydue to the
completion of internal development of theprototype units. This increase was
offset by the direct result of the Company's cost management program focusing on
internal and customer support costs and the cost of equipment sold.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the six months ended June
30, 2002 increased by approximately $2,979,000 or 46.6% compared with the same
period last year. The increase is due to higher insurance premiums, increase in
professional fees due to the various lawsuits, increase in bad debt expense
caused principally by the allowance required on the funds being held by
Medicare, and certain costs, which amounted to approximately $2,297,000 for the
six months ended June 30, 2001, that were allocated to research and development
for the technology entity, which was consistent with previous quarters
reporting. These costs were related to product development and technology. In
2002, this allocation was not necessary due to the completion of internal
development of the prototype units in 2001. These increases have been offset by
decreases in payroll, contract services and other administrative costs as a
direct result of the Company's cost management program.
20
RESEARCH AND DEVELOPMENT
Research and development expenses for the six months ended June 30, 2002
decreased by approximately $6,043,000 when compared to the same period last
year. The decrease was due to reduction in expenditures for the development of
new products that were completed in the fourth quarter of 2001, a shift in the
Company's strategic direction related to product development and the inclusion
of certain cost of services and selling, general and administrative expenses
amounting to $3,711,000 during the six months ended June 30, 2001, that were
allocated to research and development, because they related to the development
of new products. As the new products were completed in the fourth quarter of
2001, no allocation to Research and Development was necessary in 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased, in total, during the six months
ended June 30, 2002 by $61,000 as compared to the same period last year.
Amortization of goodwill decreased $138,000 for the six months ended June 30,
2001 due to the Company implementing FASB 141/142, which requires no
amortization to be taken on goodwill.
LITIGATION AND LEGAL SETTLEMENT COSTS
During the six months ended June 30, 2002, the Company has accrued
$960,000 for litigation expenses, offset by $873,000 from the settlement of
certain other litigation which had previously been accrued
OTHER INCOME (EXPENSES)
During the six months ended June 30, 2002, interest income decreased to
$344,000 compared to $916,000 for the six months ended June 30, 2001 due to a
decrease in available funds for investment purposes.
During the six months ended June 30, 2002, interest expense increased to
$1,065,000 as compared to $77,000 for the six months ended June 30, 2001,
primarily due to the increase in senior secured promissory notes issued in 2002.
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 $5,500,000 and $11,500,000, respectively, through private debt and
equity offerings, which the Company has been principally using for 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 $10,151,000 as of June 30, 2002. We
expect the working capital deficit to continue through the balance of 2002.
Historically, the Company has expended significant amounts to develop its
technology segment, including joint venture relationships, introduction into the
international market and increasing its research and development and
administrative costs. In the first and second quarters of 2002, the Company has
taken steps to dramatically reduce overall operating costs and substantially
increase unit gross margins on hardware sold. The Company has changed its
international business model from one focusing on joint ventures to seeking
partners for licensing both geographic and technology rights. The Company's
overall operating expenses exceed its cash revenues by approximately $10,188,000
for the six months ended June 30, 2002, a reduction of $2,674,000 over 2001. The
portion of the business' expenditures not funded internally and the corporate
expenditures are currently being funded through private sales of securities.
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
21
successful operations. The Company is in the process of selling its physical
therapy and rehabilitation segment, seeking additional funding 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 guarantee licensing opportunities
for our technology business, our ability to achieve significantly improved gross
profits, our ability to achieve services top and bottom line growth and our
ability to control expenses. 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 note is secured by the Accounts
Receivable of CyberCare, a second position on the accounts receivable of the
Physical Therapy subsidiary, subject to the consent of the subsidiary's existing
lender, the furniture fixture and equipment of CyberCare and the Physical
Therapy Subsidiary, subject to any existing encumbrances, inventory of
CyberCare, and the proceeds and collateral securing such proceeds of the October
31, 2000 Promissory Note from Outreach Programs, Inc. 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 had 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 issued 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.
22
During the three months ended June 30, 2002, the Company borrowed $250,000
at 8% per annum from its current Chief Executive Officer and President for
working capital purposes. As of June 30, 2002, the Company has repaid the
amounts in full.
On June 2, 2002, the Company issued a $500,000 one-year Senior Secured
Convertible Note to Manford Investments LLC. At the election of Manford, both
the 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 $0.20 per share or more than $0.75 per share. The Company issued
warrants to purchase 90,000 shares of common stock at $0.75 per share,
exercisable within 24 months. As of June 30, 2002, the warrants were valued at
$8,000 using the Black-Scholes valuation method.
The Company received $125,000 for working capital purposes and signed a
thirty-day promissory note dated June 26, 2002 to Manford Investments, LLC,
which bears interest at 8% per year. The note is currently outstanding and is
included in the current portion of notes payable as of June 30, 2002.
On August 15, 2002 the company finalized a definitive agreement with C.C.
Fortune Venture, LLC to borrow $2,000,000 (less fees of $120,000), for working
capital purposes, in exchange for a senior convertible promissory note. The
Convertible note has a 24-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
$.10 per share. The company issued warrants to purchase 400,000 shares of common
stock at $.20 per share exercisable within 36 months. The note is secured by
100% of the issued and outstanding shares of stock of CyberCare Technologies,
Inc. All of the underlying shares, whether through conversion of the Convertible
Note or exercise of the warrants, have registration rights. As of August 19,
2002 only $500,000 of this note has been funded.
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.
The Nasdaq Stock Market, Inc. ("Nasdaq") 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. In May, 2002, the Company transferred
its common stock listing to the Nasdaq SmallCap Market, which provided an
extended grace period in which to satisfy the listing requirements for the
Company's securities. The Company has 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.
On August 2, 2002, Nasdaq responded to an inquiry by the company regarding
a deficiency in outside directors supporting the Company Audit Committee
activities. Nasdaq agreed that the Company was not in compliance and needed to
remedy the situation. The Company is in the process of adding additional outside
directors and has until August 19, 2002 to remedy the deficiency. The Director
issue was due on August 16, 2002, but was combined as one requirement by Nasdaq
and the Company has until August 19, 2002 to respond.
On August 16, 2002, the Company communicated with Nasdaq on the deficiency
issues and Nasdaq indicated that the Company has until August 19, 2002 to
respond on both issues. The Company believes its common stock will be listed on
the Over the Counter (OTC) Bulletin Board, if it does not maintain its Nasdaq
listing.
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
23
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 $6,682,000 and $14,784,000 for the
six months ended June 30, 2002 and 2001, respectively. The decrease of 54.8% was
primarily as a result of the Company's ongoing cost management program, an
increase in accruals for settlement of various litigation, a loss from the sale
of Southeast Medical and Tallahassee Sleep Disorder Center, an increase in
provision for doubtful accounts, amortization of beneficial conversion feature
and discount, and common stock issued for payment of services rendered and
interest.
Cash used in investing activities was $64,000 for the six months ended
June 30, 2002 compared to cash provided by investing activities of $1,390,000
for six months ended June 30, 2001. The decrease was primarily a result of
repayments of loaned amounts during the six months ended June 30, 2001 and the
reduction in net proceeds from marketable securities.
Cash provided by financing activities was $6,091,000 and $10,105,000 for
the six months ended June 30, 2002 and 2001, respectively. The decrease was
primarily due to funds received in 2001 from the issuance of convertible
subordinated debentures and various other promissory notes, offset by direct
sales of the Company's common stock in 2002.
Total assets as of June 30, 2002 decreased to $26,892,000 or 13.9% from
December 31, 2001. This decrease was attributable to a reduction in cash as a
result of working capital requirements and the sale of Southeast Medical and
Tallahassee Sleep Disorder Center. Total cash and cash equivalents as of June
30, 2002, decreased to $38,000 from $693,000, as of December 31, 2001. Net
accounts receivable decreased $1,726,000 as of June 30, 2002. Approximately
$470,000 related to the sale of the Southeast Medical and Tallahassee Sleep
Disorder Entities, and $700,000 relating to the increase in the Medicare
allowance for the previous mentioned dispute.
Total liabilities as of June 30, 2002 increased to $26,151,000 or 25.7%
from $20,810,000 at December 31, 2001. This increase is primarily due to the
issuance of subordinated debentures in the amount of $5,500,000 and accruals for
various lawsuit liabilities.
Working capital deficiency, defined as current assets less current
liabilities increased by $7,995,000 from December 31, 2001, primarily resulting
from use of cash to fund operations, the accrual for various lawsuit
liabilities, an increase in the allowance for the receivables being held in
escrow by Medicare and the issuance of senior secured promissory notes due
within one year.
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.
24
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.
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, 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 June 30, 2002, FASB 144 had no effect.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 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. The Company completed the transitional
impairment test of goodwill and indefinite lived intangible assets during the
second quarter of 2002. Based upon the results of this test, the Company
determined that there was no impairment of goodwill or indefinite lived
intangible assets as of January 1, 2002, regarding its Pharmacy Care
subsidiary, but a potential impairment of goodwill or indefinite lived
25
intangible assets may exist relative to its two other subsidiaries, Physical
Therapy & Rehabilitation and CyberCare Technology as of January 1, 2002. The
amount of the potential impairment will be determined and disclosed prior to
December 31, 2002.
Disposal of Business
In August 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes FASB Statement 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 Accounting Principles Board (APB) Opinion No. 30,
REPORTING THE RESULTS OF OPERATIONS REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS. The Company adopted the provisions of FASB Statement
No. 144 as of January 1, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2002, the Company had outstanding $15,500,000 aggregate
principal amount of convertible subordinated debentures. Based upon the closing
bid of the Company's common stock on June 30, 2002, of $.15, as reported by the
National Market of Nasdaq, the fair value of the convertible subordinated
debentures was approximately $13,502,000.
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.
26
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
Company is unable to predict the financial impact of pending litigation at this
time.
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 June 30, 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. $76,100 was
repaid. PT&R disputes the overpayment and is submitting an appeal to CMS's
determination. As of June 30, 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. Pursuant to the
settlement, the Company issued and registered 869,566 shares of common stock,
transferred the assets of the Sleep Disorder Center (previously owned by the
plaintiff) back to the plaintiff, and made a cash payment, which the Company's
insurance carrier covered, in the amount of $200,000.
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 was reached and the Company paid $150,000 and issued 500,000 shares
of its common stock to the plaintiff. The shares were registered, and are
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
27
against the insurer for the coverage denial. On April 29, 2002 an Award of
Arbitrators was issued and on June 17, 2002, a final judgment was issued for
$1,114,000 plus interest. This amount has been reserved as of June 30, 2002.
A complaint was filed against the Company by Health Hero Network, Inc. on
May 31, 2002 in the Superior Court of California in and for the County of Santa
Clara, alleging that the Company breached its obligations to make payments for
product development services of $450,000 and seeking additional damages of
$3,388,750. The complaint was served on July 25, 2002 and a demand for
arbitration, with the American Arbitration Association was served on the Company
on July 24, 2002. The Company is investigating this matter and will respond to
the complaint, and demand for arbitration, after such investigation is complete.
The Company believes the claims lack merit and intends to vigorously defend this
suit.
The Company is in litigation with a previous employee based upon
termination of the employee's employment contract. The Company has accrued its
best estimate as of June 30, 2002 for this liability.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following is a summary of the Company's equity transactions for the
three months ended June 30, 2002 that were not registered under the Securities
Act of 1933 As Amended: all transactions were exempt from registration pursuant
to section of the act:
. 6,369,566 shares of its common stock, valued at $1,090,000, for
settlement issues of various lawsuits.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On December 17, 2001, the Company received an independent appraisal on the
leased airplanes. At that date, the average market value of all the planes was
$13,576,000 with a suggested sale price of $13,832,000.
Due to the Company's current financial situation, the Company is unable to
expend resources to maintain the aircraft in accordance with the lease agreement
with Aim and fund the required debt service. The Company has been notified by
the aircraft lender that the Company is in violation of the loan agreements. The
company has voluntarily surrendered the aircraft to the lender. As of June 30,
2002, the Company had $1,268,000 accrual for the estimated future operating
losses of Air. Based on this information and a proposal made by the Company to
Textron (the lender) as full satisfaction, the Company does not believe an
additional reserve is needed for the payment of the leases at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On April 15, 2002, the Company filed a Current Report on Form 8-K (Item 5)
regarding the resignation of its Interim Chairman of the Board.
28
On April 18, 2002, the Company filed a Current Report on Form 8-K (Item 5)
regarding the Company's review of certain former officers' compensation and the
election to discontinue payment or provision of all compensation and related
benefits to such former officers.
On April 26, 2002, the Company filed a Current Report on Form 8-K (Item 5)
regarding the successful mediation settlement of the class action litigation.
On May 2, 2002, the Company filed a Current Report on Form 8-K (Item 5)
regarding the refinancing of certain outstanding loans to Dynamic Holdings, LLC
by issuing convertible promissory notes.
On June 13, 2002, the Company filed a Current Report on Form 8-K (Item 5)
which contained a copy of an open letter from the President and CEO of the
Company to the Company's shareholders.
On June 21, 2002, the Company filed a Current Report on Form 8-K (Item 5)
regarding the non-binding letter of intent the Company entered into with iBX
Group, Inc. to sell the physical therapy and rehabilitation business and the
pharmacy business of the Company.
On August 13, 2002, the Company filed a Current Report on Form 8-K (Item
5) regarding the Company's accounts receivable lender declining to provide
additional funding above its current obligation. Also, the Company terminated
employment of its president of the Pharmacy division with certain key employees
resigning upon the president's termination. This situation may have a material
adverse effect on the Company's ongoing operation if certain key functions
cannot be replaced.
29
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)
AUGUST 14, 2002 By: /s/ JOSEPH R. FORTE
--------------- ---------------------------------
(Date) Joseph R. Forte, Chief Executive Officer and President
AUGUST 14, 2002 By: /s/ DANA PUSATERI
--------------- ---------------------------------
(Date) Dana Pusateri, Executive Vice President
AUGUST 14, 2002 By: /s/ ALAN ADELSON
--------------- --------------------------------
(Date) Alan Adelson, Executive Vice President
AUGUST 14, 2002 By: /s/ JEFF SCHULMAN
--------------- --------------------------------
(Date) Jeff Schulman, Chief Accounting Officer
30