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 September 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
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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.)
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
77,653,192 shares were outstanding as of October 31, 2002.
CYBERCARE, INC.
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2002 (unaudited) and December 31, 2001 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months
Ended September 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 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)
September 30, December 31,
2002 2001
---- ----
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents 319 $ 693
Cash - restricted 279 373
Trade accounts receivable, less allowance for doubtful accounts
of $2,157 (2002) and $1,859 (2001) 1,317 4,293
Inventories, net 3,090 2,599
Notes receivable - related parties, less allowance of $725 (2002) and
$604 (2001) to reduce to realizable value 93 228
Notes and interest receivable 1,096 1,164
Other current assets 367 867
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Total current assets 6,561 10,217
Property and equipment, net 1,907 2,439
Goodwill, net 23 5,085
Licenses, net 7,056 9,992
Notes receivable 2,867 2,455
Other assets 1,073 1,041
----- -----
Total assets $19,487 $31,229
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,182 $ 3,015
Accrued liabilities 6,722 5,724
Current portion of notes payable and long-term debt 190 85
Lines of credit 702 974
Convertible subordinated debentures, net of discounts of $45 5,456 -
Net liabilities of discontinued operations 1,689 1,660
Deferred revenue 20 746
Other current liabilities 169
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154
Total current liabilities 18,115 12,373
Convertible subordinated debentures, net of discounts of $1,344 (2002)
and $1,924 (2001) 10,510 8,076
Notes payable and long-term debt, net of current portion 29 -
Other liabilities 361
-------- --------
170
Total liabilities 28,824 20,810
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Commitments and contingencies
Stockholders' (Deficit) 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;
77,559,192 and 67,827,992 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 193 170
Capital in excess of par 129,893 127,055
Stock subscription receivable (4,740) (4,740)
Accumulated deficit (134,683) (112,066)
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Total stockholders' (deficit) equity 10,419
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(9,337)
Total liabilities and stockholders' (deficit) equity $ 19,487 $ 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 Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
- ---- - ---- - ---- - ----
Net revenues ........................................... $ 2,174 $ 3,918 $ 9,005 $10,559
------------ ------------ ------------
Costs and expenses:
Cost of services .................................. 1,963 2,656 7,324 7,524
Selling, general and administrative ............... 2,270 4,403 11,639 10,794
Research and development .......................... 426 2,513 2,113 10,244
Depreciation and amortization ..................... 474 579 1,522 1,688
Impairment of long-lived assets ................... 2,525 2,525
------------ ------------
Litigation and legal settlement costs ............. -- -- 87 --
Loss (gain) on sale of subsidiaries ............... -- 754 (92)
------------ ------------ ------------ ------------
Total costs and expenses ..................... 7,658 10,151 25,964 30,158
-------------------------------------------------------- ------------ ------------ ------------ ------------
Operating loss ......................................... (5,484) (6,233) (16,959) (19,599)
Other income (expense):
Interest income ................................... 150 263 493 1,179
Interest expense .................................. (655) (515) (1,721) (592)
Amortization of beneficial conversion feature & ... (293) (215) (753) (323)
discount
Other income ...................................... (168) 79 (154) 122
-------------------------------------------------------- ------------ ------------ ------------ ------------
Total other income (expense) ................. (966) (388) (2,135) 386
-------------------------------------------------------- ------------ ------------ ------------ ------------
Loss from continuing operations ........................ (6,450) (6,621) (19,094) (19,213)
Estimated loss on disposal of discontinued business .... (4) (1678) 461 (2,015)
Cumulative effect on prior years of change in accounting
for intangible assets .............................. (3,983) -- -- --
------------ ------------ ------------
(3,983)
Net loss ............................................... $ (10,437) $ (8,299) $ (22,616) $ (21,228)
======================================================== ============ ============ ============ ============
Loss per common share - basic and diluted:
Loss from continuing operations ................. $ (0.09) $ (0.10) $ 0.26) $ (0.30)
Discontinued operations ......................... -- (0.03) -- (0.03)
Cumulative effect on prior years of change in
accounting for intangible assets ...................... (0.05) -- (0.05 --
Net loss ........................................ $ (0.14) $ (0.13) $ (0.31) $ (0.33)
============ ============
Weighted average shares outstanding .................... 73,187,818 65,823,776 73,051,425 65,177,811
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
4
CYBERCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net loss .................................................................. $(22,616) $(21,228)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ....................................................... 555 512
Amortization ....................................................... 967 1,176
Provision for doubtful accounts .................................... 2,617 932
Amortization of beneficial conversion feature and discount ......... 753 323
Loss from unconsolidated subsidiary ................................ 16 --
Loss on disposal of fixed assets ................................... 42 --
Impairment of long-lived Assets .................................... 2,525 --
Cumulative effect on prior years of change in accounting
for intangible assets .......................................... 3,983 --
Common stock issued for services ................................... 44 390
Amortization of deferred loan costs ................................ 211 --
Common stock issued for interest ................................... 215 --
Common stock issued for settlement of lawsuits ..................... 1,004 --
Net liabilities of discontinued operations ......................... 29 (597)
Warrants issued for services ....................................... -- 780
Net assets of discontinued operations .............................. -- (1,017)
Estimated loss on disposal of discontinued business ................ -- 2,844
Loss (gain) on sale of subsidiaries ................................ 754 (92)
Changes in operating assets and liabilities, net of effects of
dispositions:
Trade accounts receivable ...................................... 98 (4,001)
Inventories .................................................... (491) (1,264)
Notes receivable and other current assets ...................... 344 (730)
Accounts payable ............................................... 496 (262)
Accrued and other current liabilities .......................... 806 833
-------- --------
Net cash used in operating activities .................... (7,648) (21,401)
-------- --------
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 (369)
Repayment from related parties, net ........................... 41 1,156
Capital expenditures .......................................... (152) (204)
Change in intangible, notes receivable and other assets ....... 265 (215)
-------- --------
Net cash provided by investing activities ................ 185 868
-------- --------
Cash Flows from Financing Activities:
Other liabilities .............................................. 184 (240)
Net borrowings under lines of credit ........................... (272) 145
Proceeds from exercise of stock options and warrants ........... -- 94
Proceeds from sale of common stock ............................. 214 --
Proceeds from sale of convertible subordinated debentures ...... 6,964 10,000
-------- --------
Net cash provided by financing activities ........... 7,090 9,999
-------- --------
Net decrease in cash and cash equivalents ................................. (373) (10,534)
Cash and cash equivalents at the beginning of period ...................... 693 15,231
-------- --------
Cash and cash equivalents at the end of period ............................ $ 319 $ 4,697
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................ $ 365 $ 341
======== ========
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 Nine Months Ended
September 30, September 30,
2002 2001
---- ----
Fair market value of detachable warrants issued with convertible
subordinated ..................................................... $ 126 $ 2,618
debentures ........................................................ --
Beneficial conversion feature on convertible debentures ........... 301
Common stock issued for payment of accounts payable ............... 466 --
Common stock issued for accrued contribution to retirement plan ... 102 61
Common stock issued for settlement of ............................. 90 125
lawsuit
Common stock received as consideration for sale of subsidiary ..... (692)
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Common stock issued for payment of accrued interest ............... 323 366
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 ....................... 16
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Common stock issued for stock subscription receivable ............. -- 900
Common stock issued on Conversion of Notes Payable ................ 175 --
Property and equipment included in other liabilities .............. -- 568
Common stock received upon incurred breach of .................... (114)
contract .......................................................... --
The following is a summary of the significant non-cash amounts that resulted
from the Company's dispositions:
For the Nine Months Ended
September 30, September 30,
2002 2001
---- ----
Assets disposed:
Accounts receivable ........................................................... $(196) $(196)
Property and equipment ........................................................ (76) (76)
Goodwill ...................................................................... (412) (412)
Other assets .................................................................. --
--- ---
Assets disposed ........................................................... (684) (684)
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Liabilities transferred:
Accounts payable .............................................................. 64 64
Accrued expenses and short-term debt .......................................... 20 20
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Liabilities transferred .................................................. 84 84
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Fair value of common stock issued ............................................... 600 600
--------------------------------------------------------------------------------- ----- -----
Cash transferred upon dispositions .............................................. $-- $--
===== =====
6
CYBERCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 in Southern Florida. Its staff of clinicians and
therapists complement 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 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 nine months ended September 30, 2002 of $22,616,000,
negative cash flow from operating activities of $7,649,000, a working capital
deficiency of $11,554,000 and certain loan covenant violations at September 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, or that the Company can attain successful
operations. In addition, on November 1, 2002, the company's common stock was
delisted from trading on the NASDAQ stock market (see note 6) which may make it
more difficult for the Company to obtain additional financing or other capital.
Future Capital Needs
7
For the nine months ended September 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
various operating entities, and 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 additional equity or debt financing. The Company is
also continuing to reduce its overall monthly cash burn rate and management
believes that it is at or near a cost 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 September 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.
Cumulative Effect of Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets". 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 the
Company 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 which will result in a reduction of the Company's
amortization expense by 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 Pharmacy Care segment, 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 was
estimated at 5,394,000 as a result of the transitional impairment test.
During the quarter ended September 30, 2002, the Company noted additional
indicators of impairment in its Pharmacy Care and Physical Therapy &
Rehabilitation segments. In particular, the Company experienced a significant
decline in the operations of these two segments during the third quarter of
2002. As a result, the Company finalized its transitional impairment test and
also performed an updated valuation of its intangible assets at September 30,
2002 to determine whether any additional
8
impairment had occurred. As a result of these analyses, the Company determined
that its intangible assets were impaired by $6.5 million at September 30, 2002.
Of this amount, approximately $4.0 million was impaired as of January 1, 2002
and the remainder had become impaired subsequent to that date. The $3.98 million
impairment that existed at January 1, 2002 was recorded as the cumulative effect
of change in accounting principle as the result of adopting SFAS 142. The
remaining $2.5 million was recorded in operations as an impairment of long-lived
assets during the quarter ended September 30, 2002.
Recent Accounting Pronouncements
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:
September 30, 2002
SEPTEMBER 30, 2002 DECEMBER 31, 2001 AMORTIZATION PERIODS (YEARS)
------------------ ----------------------------------------------
Licenses ............... $ 10,937 $ 12,906 10
Accumulated Amortization (3,881) (2,914)
-------- --------
Licenses, net .......... $ 7,056 $ 9,992
======== ========
Goodwill ............... $ 616 $ 5,746 _
Accumulated Amortization (593) (661)
-------- --------
Goodwill, Net .......... $ 23 $ 5,085
======== ========
The following reconciliation adjusts net loss for amortization expense related
to goodwill that is no longer amortized under the provisions of SFAS No. 142:
Three Months Ended Nine Months Ended
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
(Unaudited, amounts in thousands, except
per share data)
Net loss ................................ $ (8,299) $(21,228)
Goodwill amortization, net of tax ....... 70 208
-------- --------
Adjusted net loss ....................... $ (8,229) $(21,020)
======== ========
Basic and diluted net loss per share:
9
Net loss ................................ $ (0.13) $ (0.33)
Goodwill amortization ................... .00 .00
-------- --------
Adjusted net loss ....................... $ (0.13) $ (0.33)
======== ========
Basic and diluted weighted average shares
outstanding ............................. 65,824 65,178
======== ========
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 adjusted conversion price (calculated as
proceeds received less the value allocated to the warrants and to the fees
divided by the $0.30) was less than then trading price of the stock on the
commitment date or date of funding. As a result the company recorded a
beneficial conversion feature that is being accreted through interest expense
over the one year life of the underlying debenture. Beneficial conversion
calculated for the underlying debenture was $88,000, with the beneficial
conversion accreted for 2002 amounting to $46,000 for the nine months ended
September 30, 2002. The notes are 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, fixtures 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 September 30, 2002,
the warrants were valued at $78,000 using the Black-Scholes valuation method.
The warrants are being accreted through interest expense over the one year life
of the underlying debentures. 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.
10
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 adjusted conversion
price (calculated as proceeds received less the value allocated to the warrants
and to the fees divided by the $0.20) was less than then trading price of the
stock on the commitment date or date of funding. As a result the company
recorded a beneficial conversion feature that is being accreted through interest
expense over the one year life of the underlying debenture. Beneficial
conversion calculated for the underlying debenture was $11,000, with the
beneficial conversion accreted for 2002 amounting to $4,000 for the nine months
ended September 30, 2002. The Company issued warrants to purchase 90,000 shares
of common stock at $0.75 per share, exercisable within 24 months. As of
September 30, 2002, the warrants were valued at $6,000 using the Black-Scholes
valuation method. The warrants are being accreted through interest expense over
the one year life of the underlying debentures
On August 14, 2002, the Company issued a $2,000,000 two year Senior Secured
Convertible Note to C.C. Fortune Venture, LLC. The convertible note requires
interest at 10% per annum, increasing to 15% retroactively upon default. At the
election of the lender, both principal and interest is convertible into shares
of the Company's common stock at $0.10 per share. The adjusted conversion price
(calculated as proceeds received less the value allocated to the warrants and to
the fees divided by the $0.10) was less than then trading price of the stock on
the commitment date or date of funding. As a result the company recorded a
beneficial conversion feature that is being accreted through interest expense
over the two year life of the underlying debenture. Beneficial conversion
calculated for the underlying debenture was $201,520. 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. The Company also
issued warrants, the warrants were valued at $27,200 using the Black-Scholes
valuation method to purchase 400,000 shares of common stock at $0.20 per share,
and are exercisable for a period of 36 months from the date of grant. The
warrants are being accreted through interest expense over the two year life of
the underlying debentures. The Company is also liable for a commission (payable
in cash, $120,000 and warrants) and the Lender's legal fees in connection with
review of the transactional documents and closing of the transaction. As of
October 8, 2002, the Company had issued the Convertible Notes for the entire
$2,000,000.
Currently the Company is in default of its Senior Secured debentures for
non payment of interest. Also, the company is in default with its Physical
Therapy and Rehabilitation lender for falling below its allowable eligible
assets. At this time neither of the debt holders have called the note agreements
and they are working with the company to rectify the defaults in a beneficial
manner for both the company and the holders of the notes.
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:
September 30, 2002 December 31, 2001
------------------------ ----------------------
Component parts $ 1,893,000 $ 1,616,000
Work-in-process 29,000 29,000
Finished goods 1,168,000* 954,000
----------- -----------
11
$ 3,090,000 $ 2,599,000
=========== ===========
* Included in finished goods as of September 30, 2002 is $480,000 of
inventory that has been shipped to Syzex and is the subject of certain
litigation. It is the company's' position that the inventory was properly
sold to Syzex and we are demanding full payment of the sale as part of the
litigation. Inventory adjusted for the Syzex owned inventory is $2,610,000,
with finished goods inventory of $688,000.
Note 5 - Dispositions and Discontinued Operations
DISCONTINUED OPERATIONS
Prior to January 1, 2002, the Company accounted for discontinued operations
in accordance with 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, which
required that the disposal of a segment be treated as a discontinued operation
upon meeting certain criteria, including management agreeing to and commencing
with a formal plan to dispose of a segment. As discussed in Note 1, the Company
adopted SFAS No. 142 on January 1, 2002. SFAS No. 142 permits discontinued
operations treatment for components of a segment and expands the types of
transactions that require discontinued operations treatment. Thus, disposal
transactions that were commenced prior to January 1, 2002 have been accounted
for under APB No. 30 while disposals that occurred during 2002 have been
accounted for under SFAS No. 144. SFAS No. 144 also requires that discontinued
operations that were treated as such prior to adopting SFAS No. 144 continue to
be accounted for under APB No. 30 until such time as discontinued operations
accounting treatment is no longer required.
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 financial situation, the Company was unable to expend
resources to maintain the aircraft in accordance with the lease agreement with
Aim and fund the required debt service. The Company was notified by the aircraft
lender that the Company was in violation of the loan agreements. The company has
voluntarily surrendered the aircraft to the lender. As of September 30, 2002,
the Company had $1,268,000 accrued 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 at this time does not believe an
additional reserve is needed for the payment of the leases at this time. Textron
has begun the process of selling the aircraft, thus reducing the debt obligation
of the company. At present, Textron was unable to provide the company a final
figure for the required deficiency. The company has made a proposal to Textron
in full satisfaction of any deficiency amount. This proposal is being considered
by Textron.
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 in accordance with APB
No. 30.
12
During the quarter ended September 30, 2002, the Company ceased operations
at approximately 30 of its Physical Therapy and Rehabilitation locations. Such
closures have been treated as discontinued operations under SFAS No. 144 and,
accordingly, the revenues and expenses of such locations have been reclassified
to discontinued operations for all periods presented in the accompanying
condensed consolidated statements of operations. The assets of these locations
primarily consisted of assets leased under operating leases and thus required no
reclassification of assets or liabilities of discontinued operations at
September 30, 2002. The Company does not expect the resulting loss from the
disposal of these locations to be material to its financial position or results
of operations.
DISPOSITIONS
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.
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.
Nine months ended September 30,
2002 2001
------------------------------
Revenue ..................................... $ 11,998,000 $ 12,682,000
Net loss .................................... $(22,359,000) $(18,366,000)
Net loss per common share (basic and diluted) $ (0.31) $ (0.28)
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
13
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 September 30,
2002, the Company had issued the 5,000,000 shares of common stock.
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 $1,300,000 of overpayments were made. PT&R
disputes the overpayment and has an appeal hearing set for the week of February
11, 2003. As of September 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 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 September 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, and counter sue Health Hero Network Inc
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 September 30, 2002 for this liability.
14
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 had until August 19, 2002 to regain
compliance under 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's Audit Committee
activities. Nasdaq agreed with the Company's assertion that it was not in
compliance with the audit committee requirements of NASDAQ and needed to remedy
the situation. 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. The Company has subsequently added outside directors after the NASDAQ
deadline.
On October 31, 2002 the Company received notice that it would be delisted
from the NASDAQ Small cap market. On November 1, 2002, the Company's common
stock was delisted from trading, on the NASDAQ stock market. The Company's
common stock is currently trading on the NASD over the counter bulletin board.
On October 31, 2002 the Company advised NASDAQ of its intention to appeal the
delisting decision.
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 were secured by the accounts
receivable of the Pharmacy business. As of September 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, however, the note remained
outstanding at November 19, 2002. The note is included in the current portion of
notes payable and long-term debt as of September 30, 2002.
On October 21, 2002, the Company received $95,000 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 was repaid on November 1, 2002.
On October 30, 2002, the Company received $39,500 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 was repaid on November 1, 2002.
On November 14, 2002, the Company received $50,000 from CC Fortune Venture
LLC under a $230,000 promissory note, which bears interest at 8% per year for
working capital purposes. The term is for 30 days.
Note 9 - Changes in Stockholders' Equity
During the three months ended September 30, 2002, the Company issued:
.. 10,056 shares of common stock, valued at $1,400, which was purchased under
the Company's Employee Stock Purchase Plan,
15
.. 35,000 shares of common stock, valued at $4,200, in settlement of a
severance dispute,
.. 178,571 shares of common stock, valued at $25,000, in settlement of certain
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 to the individual management of the segment,
the Chief Accounting Officer, the Corporate Executive Vice President 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, 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 5, the Company
entered into an agreement to sell Air during September 2001. Accordingly, Air is
not separately presented below for either September 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 nine months ended September 30, 2002 and 2001 is
as follows:
Physical Therapy
For the three months and
ENDED SEPTEMBER 30, 2002 REHABILITATION PHARMACY TOTAL SERVICES TECHNOLOGY OTHER CONSOLIDATED
------------------------ -------------- -------- -------------- ---------- ----- ------------
Net revenues ....... $ 1,085,000 $ 1,034,000 $ 2,119,000 $ 55,000 $ -- $ 2,174,000
Loss from continuing
operations ......... (3,725,000) (1,404,000) (6,450,000)
(2,249,000) (1,476,000) (1,321,000)
Total assets ....... $ 3,486,000 $ 1,847,000 $ 5,333,000 $ 6,227,000 $ 19,847,000
$ 14,435,000
Physical Therapy
For the three months and
ENDED SEPTEMBER 30, 2001 REHABILITATION PHARMACY TOTAL SERVICES TECHNOLOGY OTHER CONSOLIDATED
------------------------ -------------- -------- -------------- ---------- ----- ------------
Net revenues ........... $ 1,302,000 $ 1,586,000 $ 2,888,000 $ 1,030,000 -- $ $3,918,000
Income (loss) from
continuing operations
(66,000) (226,000) (292,000) (3,725,000) (2,604,000) (6,621,000)
Total assets ........... $ 6,501,000 $ 2,361,000 $ 8,862,000 $ 20,921,000 $ 19,900,000 $ 49,683,000
For the nine months
ENDED SEPTEMBER 30, 2002
Net revenues ........... $ 3,625,000 $ 4,826,000 $ 8,451,000 $ 554,000 $ -- $ 9,005
Loss from continuing
operations ............. $ (3,198,000) $ (1,748,000) $ (4,946,000) $ (6,080,000) $ (8,068,000) $(19,094,000)
For the nine months
ENDED SEPTEMBER 30, 2001
Net revenues ........... $ 4,307,000 $ 4,606,000 $ 8,913,000 $ 1,646,000 $ -- 10,559,000
Income (loss) from
continuing operations .. $ (146,000) $ (444,000) $ (590,000) $(13,540,000) $ (5,083,000) $(19,213,000)
Note 11 - Subsequent Events
16
On October 31, 2002 the Company received notice that it would be delisted
from the NASDAQ Small cap market. On November 1, 2002, the Company's common
stock was delisted from trading, on the NASDAQ stock market. The Company's
common stock is currently trading on the NASD over the counter bulletin board.
On October 31, 2002 the Company advised NASDAQ of its intention to appeal the
delisting decision.
A forbearance agreement was entered into with Healthcare Business Credit
Corporation, the lender for the Physical Therapy segment, whereby the lender
will split accounts receivable collections made to pay down the line of credit
and advance those amounts to the Physical Therapy segment.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
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 payers;
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.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002 and 2001
18
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 SEPTEMBER 30 ENDED SEPTEMBER 30
------------------- ------------------
2002 2001 2002 2001
Net Net % CHANGE Costs of Costs of
--------
REVENUE REVENUE SERVICES SERVICES % CHANGE
Physical Therapy and
Rehabilitation Services $1,085,000 $1,302,000 (16.67) $ 684,000 $ 501,000 36.52
Pharmacy Services 1,034,000 1,586,000 (34.74) 993,000 1,408,000 (29.5)
---------- ---------- ----- ---------- ---------- -----
Total Service Businesses 2,119,000 2,888,000 (26.59) 1,677,000 1,909,000 (12.15)
Technology 55,000 1,030,000 (94.7) 286,000 747,000 (61.7)
------------------------ ---------- ---------- ----- ---------- ---------- -----
Total ............ $2,515,000 $3,918,000 (35.8) $1,963,000 $2,656,000 (26.09)
========== ========== ===== ========== ========== ======
NET REVENUES
Net revenues for the three months ended September 30, 2002 decreased by
approximately 35.8% when compared to the three months ended September 30, 2001.
The net revenue decrease was a result of a decrease in the physical therapy and
rehabilitation services segment (PT&R) of approximately $217,000, a decrease in
the pharmacy services segment of $551,000, and a decrease in the technology
segment of approximately $976,000, of which $247,000 was generated within the
Sleep disorder center which is not part of the technology business in the third
quarter of 2002.
The decrease in the Physical Therapy & Rehabilitation Services excluding
the physician practice and chiropractic practice which were sold in January 2001
and January 2002 respectively, had a decrease in revenue of $18,000 for the
three months ended September 30, 2002 over the same period last year. The
decrease was due to loss of business due to capital shortages, and an effort to
close unprofitable clinics. As a result, the segment closed approximately 30
clinics during the three month period, and is concentrating its growth efforts
on its existing clinics by initially focusing on operational earnings rather
than top line revenues. The closed clinics have been accounted for as
discontinued operations in accordance with SFAS no,. 144. Once these clinics and
the corporate overhead are operationally secure with proper cost management in
place, focus will again return to growing profitable revenue at these and other
clinics.
Due to the sale of the chiropractic practice, which is part of PT&R, on
January 7, 2002, no revenue is reflected in the 2002 financial statements, but
for the three months ended September 30, 2001, the practice generated
approximately $199,000 of revenue.
The decrease in the Pharmacy services segment is a direct result of a loss
of approximately 60 facilities due to, activities which occurred after the
dismissal of the unit President and the improper interpretation of what was
disclosed in the Company's August 13, 2002 8-K filing. The segment is currently
operating and servicing approximately 15 facilities and is in the process of
expanding with the recent hiring of a sales/marketing professional and new
Pharmacist/General Manager. The company has been acting under the advice being
provided by legal counsel specifically with regard to options that the company
may have resulting from activities of former employees and possibly pharmacy
competitors. The company plans to aggressively pursue all legal remedies in
order to protect the company and its' shareholders. As a result of the Company's
investigation surrounding the dismissal of the President of the Pharmacy
services segment and the resulting loss of business, an employee alleged that
this segment
19
was recycling drugs and not following drug disposal procedures. The Company is
in the process of utilizing outside counsel to investigate this situation, but
at this time cannot conclude as to whether any liability or exposure exists
regarding this matter.
The technology segment revenue (EHC related revenue), excluding the
Company's Sleep Disorder Center which was transferred in May 2002 to its
previous owner, decreased by approximately $729,000. Revenue of $450,000 from
one customer booked in the third quarter of 2001 was reversed in the 4th quarter
of 2001.; therefore, the net decrease in revenue was $279,000.
The Sleep Disorder Center generated $247,000 of revenue during the three
months ended September 30, 2001.
COST OF SERVICES
Costs of services for the three months ended September 30, 2002 decreased
by approximately 26.1%, $693,000, when compared to the three months ended
September 30, 2001. The cost of services decrease was a result of an increase in
the physical therapy and rehabilitation services segment of approximately
$183,000, a decrease in the pharmacy services segment of $415,000 and a decrease
in the technology segment of approximately $1,106,000.
The increase in cost of services relating to the physical therapy and
rehabilitation services segment are related to the cost of payroll paid during
the three months ended September 30, 2002 for the closed clinics. The decrease
in cost of services for the Pharmacy services segment is representative of the
decreases in revenue for such segments. There were decreases in overall
operating costs which are directly consistent with the corresponding decreases
in revenue for such segments. There were decreases in direct operating costs
such as salaries, rent, insurances and supplies due to the closing of operating
locations.
The cost of services for the technology segment for the three months ended
September 30, 2002 decreased by approximately 61.7% as compared to the same
period last year. The decrease was a direct result of the previously mentioned
revenues generated in 2001 with an approximate cost of $450,000 as well as the
ongoing concerted effort of the company to reduce its operating costs. Such
costs reductions included the reduction of payroll related costs of
approximately of $450,000, an increase in network services of $98,000, and a
reduction of telephone related services of $170,000. During the three months
ended September 30, 2001, $646,000 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.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three months ended
September 30, 2002 decreased by 48.4% as compared to the three months ended
September 30, 2001 primarily due to the reduction in payroll related costs of
$1,080,000, and a reduction in professional fees and contract services of
$1,672,000. During the three months ended September 30, 2001, certain costs
amounting to approximately $922,000 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. 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 September 30,
2002 decreased by approximately $2,087,000 or 83.1% 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
20
Research and Development relating to the development of new products. These
costs amounted to approximately $1,568,000 for the three months ended September
30, 2001. New methodology and approaches instituted in the later half of 2001
and continued through 2002 continue to generate improved research and
development efforts with significant reductions in spending.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased, in total, during the three months
ended September 30, 2002 by $105,000 as compared to the same period last year.
Amortization as a result of adapting SFAS 142, which no longer requires goodwill
to be amortized, decreased $70,000. However, when the impairment valuation for
SFAS 142 was performed an operational impairment of $1,640,000 was recorded for
the PT&R segment and an $885,000 impairment was recorded for the Pharmacy
segment for the three months ended September 30, 2002.
OTHER INCOME (EXPENSE)
During the three months ended September 30, 2002, interest income decreased
to $150,000 compared to $263,000 for the three months ended September 30, 2001,
due to a decrease in available cash for investment purposes.
During the three months ended September 30, 2002, interest expense
increased to $655,000 compared with $515,000 for the three months ended
September 30, 2001, primarily due to the Company's issuance of the additional
$5,000,000 in senior secured convertible notes and convertible subordinated
debentures required to fund the ongoing operations of the Company in March and
April 2002.
During the three months ended September 30, 2002, amortization of
beneficial conversion feature and discount increased to $293,000 compared with
$215,000 for the three months ended September 30, 2001 primarily due to the
Company's issuance of the senior secured convertible notes in 2002 of
$7,500,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002 AND 2001
For the Nine Months For the Nine Months
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------- ------------------
2002 2001 2002 2001
Net Net % CHANGE Costs of Costs of
--------
REVENUE REVENUE SERVICES SERVICES % CHANGE
Physical Therapy and
Rehabilitation Services $ 3,625,000 $ 4,307,000 (15.83) $ 1,688,000 $ 1,930,000 (12.5)
Pharmacy Services 4,826,000 4,606,000 4.8 4,156,000 3,846,000 8.1
------------------------- ----------- ----------- ----- ----------- ----------- ----
Total Services Businesses 8,451,000 8,913,000 (5.2) 5,844,000 5,776,000 (1.1)
Technology 554,000 1,646,000 (66.3) 1,480,000 1,746,000 (15.3)
------------------------- ----------- ----------- ----- ----------- ----------- ----
Total ............ $ 9,005,000 $10,559,000 (14.7) $ 7,324,000 $ 7,522,000 (2.6)
=========== =========== ===== =========== =========== ====
NET REVENUE
Net revenue for the nine months ended September 30, 2002 decreased by
approximately 14.7% when compared to the nine months ended September 30, 2001.
The decrease was a result of a decrease in the physical therapy and
rehabilitation services segment of approximately $682,000. However, The
21
physical therapy and rehabilitation services segment, excluding the physician
practice and chiropractic practice, increased approximately $102,000 for the
nine months ended September 30, 2002. and an increase in the pharmacy services
segment of $220,000, and a decrease in the technology segment of approximately
$1,092,000.
In addition to the closing of a number of unprofitable clinics and a lack
of support from our medical directors due to lack of cash availability, the
closed clinics have been accounted for as discontinued operations in accordance
with SFAS no. 144. The decrease in revenue during the nine months ended
September 30, 2002 as compared to 2001 for the physical therapy and
rehabilitation segment was also due to the sale of the physician practice
(January 2001) and chiropractic center (January 2002) which generated total
revenue of approximately $784,000 for the nine months ended September 30, 2001.
The increase in revenue from our pharmacy services segment resulted from an
increase in services and the expansion of the customer base during the first two
quarters of 2002.
The technology segment, excluding the Sleep Disorder Center, had a decrease
in revenue of $815,000, which included a customer order which was subsequently
reversed in the fourth quarter of 2002 of $450,000, for a net decrease in
revenue of $365,000.
The Sleep Disorder Center had a decrease in revenue of approximately
$277,000 because the current year's revenue was only generated during a portion
of the nine-month period ended September 30, 2002 compared to the full
nine-month period in 2001.
COST OF SERVICES
Cost of services for the nine months ended September 30, 2002 decreased by
approximately $198,000 when compared to the nine months ended September 30,
2001. The cost of services decrease was a result of a decrease in the physical
therapy and rehabilitation services segment of approximately $242,000, an
increase in the pharmacy services segment of $310,000 and a decrease in the
technology segment of approximately $267,000.
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 $125,000.
The physician and chiropractic practices were sold in January 2001 and 2002
respectively, therefore the September 2002 cost of services to the PT&R segment
do not include any activity from these entities. During the nine months ended
September 30, 2001, the financial statements include approximately $367,000 of
such costs.
The cost of services relating to the pharmacy segment increased due to the
hiring of additional full-time and contract personnel experienced prior to the
third quarter of 2002 and higher costs relative to the purchase of prescription
drugs. Additionally, sale of growth hormone was dramatically reduced since early
august which had significantly lower cost of goods and therefore impacted the
overall cost of services of the pharmacy operating unit
The technology segment, excluding the Sleep Disorder Center subsidiary,
increased its cost of services during the nine months ended September 30, 2002
as compared to the nine months ended September 30, 2001 by approximately
$10,000. However this increase is reduced by $2,054,000 of costs classified as
costs of services, which were related to product development and technology,
which were allocated to Research and Development in the nine months ended
September 30, 2001. There were increases in costs in 2002 such as those which
were 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 $420,000. This allocation was consistant with prior quarters
accounting.
22
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the nine months ended
September 30, 2002 increased by approximately $845,000, or 7.8%, compared with
the same period last year. The increase is due to an increase in bad debt
expense caused principally by the allowance required on the funds being held by
Medicare. In addition approximately $3,220,000 of certain costs related to
product technology development for the nine months ended September 30, 2001, was
allocated to research and development for the technology entity, which was
consistent with previous quarters. These increases have been offset by decreases
in payroll, contract services and other administrative costs as a direct result
of the Company's cost reduction program.
RESEARCH AND DEVELOPMENT
Research and development expenses for the nine months ended September 30,
2002 decreased by approximately $8,131,000 when compared to the same period last
year. The decrease was due to reductions 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 $5,279,000 during the nine months ended September 30, 2001, that
were allocated to research and development, because they related to the
development of new products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased, in total, during the nine months
ended September 30, 2002 by $166,000 as compared to the same period last year,
primarily as a result of adopting SFAS 142 which no longer requires goodwill to
be amortized.
LITIGATION AND LEGAL SETTLEMENT COSTS
During the nine months ended September 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 (EXPENSE)
During the nine months ended September 30, 2002, interest income decreased
to $493,000 compared to $1,179,000 for the nine months ended September 30, 2001
due to a decrease in available funds for investment purposes.
During the nine months ended September 30, 2002, interest expense increased
to $1,721,000 as compared to $592,000 for the nine months ended September 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. During the nine months ended September
30, 2002 and 2001, the Company raised approximately $7,300,000 and $10,000,000,
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 $11,554,000 as of September 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
23
research and development and administrative costs. In the first three quarters
of 2002, the Company has taken steps to dramatically reduce overall operating
costs and substantially increase unit gross margins on hardware sold and
revenues received from network operations. 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 $13,169,000
for the nine months ended September 30, 2002, a reduction of $5,725,000 over
2001. The portion of the Company's operating expenditures that are not funded
internally as well as 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 successful operations. The Company is in
the process of seeking buyers of its' operating units, seeking additional
funding and executing cost reduction measures 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.
If the company cannot immediately generate working capital, the company
will consider all available options to protect the business, its' shareholders
and its' creditors.
Our future capital requirements will depend on numerous factors, including
profitable revenue growth, 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 revenue and profitability growth from our service segments
and our ability to control expenses. The Company expects operating losses to
continue through 2002, although at a reduced rate as compare to prior quarters.
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.
24
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.
During the three months ended September 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 September 30, 2002, the Company had repaid
this borrowing 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 is 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 September 30, 2002, the warrants were valued at $6,000 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 September 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 is 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 October 8,
2002 all of this note has been funded.
On October 21, 2002, the Company received $95,000 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 was repaid on November 1, 2002.
On October 30, 2002, the Company received $39,500 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 was repaid on November 1, 2002.
On November 14, 2002, the Company received $50,000 from CC Fortune Venture
LLC under a $230,000 promissory note, which bears interest at 8% per year for
working capital purposes. The term is for 30 days.
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
25
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's Audit Committee
activities. Nasdaq agreed with the Company's assertion that it was not in
compliance with the audit committee requirements of NASDAQ 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. On November 1, 2002, the Company's common stock was
delisted from trading, on the NASDAQ national market. The Company's common stock
is currently trading on the NASDAQ Over the Counter Bulletin Board.
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. The
delisting of the trading of the Company's common stock from the NASDAQ National
Market will most likely make it more difficult to obtain capital on terms
acceptable to the company. 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 $7,339,000 and $21,401,000 for the
nine months ended September 30, 2002 and 2001, respectively. The decrease of
65.7%, $14,062,000, was primarily a result of the Company's ongoing cost
reduction 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, a decrease in revenue from the
Pharmacy Care and Physical Therapy segments due to the reduction in customers
and clinics, amortization of beneficial conversion feature and discount, and
common stock issued for payment of services rendered and interest.
Cash provided by investing activities was $120,000 for the nine months
ended September 30, 2002 compared to cash provided by investing activities of
$868,000 for the nine months ended September 30, 2001. The decrease was
primarily a result of repayments of loaned amounts during the nine months ended
September 30, 2001 and the reduction in net proceeds from marketable securities,
as compared to the current period.
Cash provided by financing activities was $6,846,000 and $9,999,000 for the
nine months ended September 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 September 30, 2002 decreased to $19,487,000 or 37.6%
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
September 30, 2002, decreased to $319,000 from $693,000, as of December 31,
2001. Net accounts receivable decreased $2,976,000 as of September 30, 2002.
Approximately $470,000 of the decrease in accounts receivable 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 with
26
the balance due to the reduction in revenues generated from the Physical Therapy
and Pharmacy segments. Also, overall assets decreased due to depreciation and
amortization of property and equipment and licenses of $1,522,000.
Total liabilities as of September 30, 2002 increased to $28,824,000 or
38.5% from $20,810,000 at December 31, 2001. This increase is primarily due to
the issuance of subordinated debentures in the amount of $7,500,000 and accruals
for various lawsuit liabilities.
Working capital deficiency, defined as current assets less current
liabilities increased by $9,398,000 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.
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 payers, 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
27
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 September 30, 2002, there was an operating impairment on long
lived assets of $885,000 for the Pharmacy Care segment and a $1,640,000 for the
Physical Therapy segment. In addition a cumulative effect impairment was
determined on the Technology segment of $3,793,000, and $190,000 for the
Physical Therapy segment.
Cumulative Effect of Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets". 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 the
Company 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 which will result in a reduction of the company's
amortization expense by 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 Pharmacy Care segment, 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 was
estimated at 5,394,000 as a result of the transitional impairment test.
During the quarter ended September 30, 2002, the Company noted additional
indicators of impairment in its Pharmacy Care and Physical Therapy &
Rehabilitation segments. In particular, the Company experienced a significant
decline in the operations of these two segments during the third quarter of
2002. As a result, the Company finalized its transitional impairment test and
also performed an updated valuation of its intangible assets at September 30,
2002 to determine whether any additional impairment had occurred. As a result of
these analyses, the Company determined that its intangible assets were impaired
by $6.5 million at September 30, 2002. Of this amount, approximately $4.0
million was impaired as of January 1, 2002 and the remainder had become impaired
subsequent to that date. The $3.98 million impairment that existed at January 1,
2002 was recorded as the cumulative effect of change in accounting principle as
the result of adopting SFAS 142. The remaining $2.5 million was recorded in
operations as an impairment of long-lived assets during the quarter ended
September 30, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
28
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 September 30, 2002, the Company had outstanding $17,500,000 aggregate
principal amount of convertible subordinated debentures.
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.
29
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 has been approval by the court. As of
September 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 September 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
30
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 September 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, and counter sue Health Hero Network Inc
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 September 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 September 30, 2002 that were not registered under the
Securities Act of 1933 As Amended: all transactions were exempt from
registration:
All of the securities transactions were registered under the Securities Act
of 1933 as amended.
Item 3. Defaults Upon Senior Securities
Currently the Company is in default of its Senior Secured debentures for
non payment of interest. Also, the company is in default with its Physical
Therapy and Rehabilitation lender for falling below its allowable eligible
assets. At this time neither of the debt holders have called the note agreements
and they are working with the company to rectify the defaults in a beneficial
manner for both the company and the holders of the notes.
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 was unable to
expend resources to maintain the aircraft in accordance with the lease agreement
with Aim and fund the required debt service. The Company was notified by the
aircraft lender that the Company was in violation of the loan agreements. The
company has voluntarily surrendered the aircraft to the lender. As of September
30, 2002, the Company had $1,268,000 accrual for the estimated future operating
losses of Air. Based on this
31
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.
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
the employment of the president of its Pharmacy segment and that 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.
32
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)
NOVEMBER 19, 2002 By: /S/ JOSEPH R. FORTE
----------------- --------------------------------------------
(Date) Joseph R. Forte, Chief Executive Officer
and President
NOVEMBER 19, 2002 By: /S/ ALAN ADELSON
----------------- -----------------------------------
(Date) Alan Adelson, Executive Vice President
NOVEMBER 19, 2002 By: /S/ JEFF SCHULMAN
----------------- -----------------------------------
(Date) Jeff Schulman, Chief Accounting Officer
33
CERTIFICATIONS
Statement Under Oath Regarding Facts and Circumstances Relating to Exchange Act
Filings
I, Joseph Forte, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CyberCare, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements wade, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules l3a-14 and 15d-l4) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing data of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions)
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: November 19, 2002
/s/ Joseph Forte,
-------------------------------------
Joseph Forte, President & CEO
Sworn to before me this
_____th day of November 2002
---------------------------
Notary Public
CERTIFICATIONS
Statement Under Oath Regarding Facts and Circumstances Relating to Exchange Act
Filings
I, Jeffrey Schulman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CyberCare, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements wade, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules l3a-14 and 15d-l4) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing data of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions)
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: November 19, 2002
/s/
--------------------------------------
Jeffrey Schulman
Chief Accounting Officer
Sworn to before me this
_____th day of November 2002
---------------------------
Notary Public
CERTIFICATION PURSUANT TO
18 US.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CyberCare, Inc. (the Company) on
Form 10-Q for the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission (the "Report"), I, Joseph Forte, President & CEO of the
Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 that:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the consolidated financial condition of the Company
as of the dates presented and consolidated result of operations of the
Company for the period presented.
Dated: November 19, 2002
/s/
--------------------------
Joseph Forte
President & CEO
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes Oxley Act of 2002 and has not been filed as part of the Report or as a
separate disclosure document.
CERTIFICATION PURSUANT TO
18 US.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CyberCare, Inc. (the Company) on
Form 10-Q for the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission (the "Report"), I, Jeffrey Schulman, Chief Accounting
Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the consolidated financial condition of the Company
as of the dates presented and consolidated result of operations of the
Company for the period presented.
Dated: November 19, 2002
/s/
------------------------------
Jeffrey Schulman
Chief Accounting Officer
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes Oxley Act of 2002 and has not been filed as part of the Report or as a
separate disclosure document.