10-Q 1 d89809e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001, OR 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 0-25777 ------- TENDER LOVING CARE HEALTH CARE SERVICES, INC. --------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 11-3476656 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1983 MARCUS AVENUE, LAKE SUCCESS, NEW YORK 11042 ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (516) 358-1000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . The number of shares of common stock outstanding on August 10, 2001 was 11,809,653. 2 TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- INDEX --------------------------------------------------------------------------------

2 3 PART I. FINANCIAL INFORMATION ----------------------------- TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES -------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) ---------------------------------

3 4 TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES -------------------------------------------------------------- CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED) ----------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) -----------------------------------

4 5 TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES -------------------------------------------------------------- CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) ----------------------------------------------------------- (IN THOUSANDS) --------------

5 6 TENDER LOVING CARE HEALTH CARE SERVICES, INC. AND SUBSIDIARIES -------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- 1. FINANCIAL STATEMENTS - Basis of Presentation: Tender Loving Care Health Care Services, Inc. ("TLCS" or "the Company") is a leading provider of home health care services with 87 locations in 22 states and the District of Columbia. The accompanying unaudited condensed consolidated financial statements reflect the results of operations of TLCS and its related financial position and cash flows. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal and recurring accruals) necessary to present fairly the financial position of the Company and its subsidiaries as of June 30, 2001 and February 28, 2001 and the results of operations and the cash flows for the three months ended June 30, 2001 and 2000. The results for the three months ended June 30, 2001 and 2000 are not necessarily indicative of the results for an entire year. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's audited financial statements as of February 28, 2001 and for the fiscal year then ended which are included in the Company's Annual Report on Form 10-K. Change in Reporting Period: During the fourth quarter of the fiscal year ended February 28, 2001, the Company's Board of Directors voted unanimously to change the Company's fiscal year-end to March 31 from February 28/29. The accompanying unaudited condensed consolidated financial statements reflect results of operations for the three months ended June 30, 2001. The results of operations for the three months ended June 30, 2001 ("the 2001 period") are comparable to the results of operations for the three months ended May 31, 2000 ("the 2000 period"). The financial information for the comparable prior year period is not distorted by use of the quarterly period which ended on May 31, 2000. The Registrant does not believe that seasonal or other factors exist in any material respect that could affect the comparability of information or trends reflected. Accordingly, the Registrant has not undertaken a recasting of quarterly information for its prior year. The net loss of $683 thousand for the one month period ended March 31, 2001 was recorded directly to Stockholders' Equity (Deficit) as a reduction to retained earnings. The following table presents the Company's condensed consolidated financial information for the one month period ended March 31, 2001 (dollars in thousands): 6 7

The following table presents the Company's condensed consolidated cash flow information for the one month period ended March 31, 2001:

2. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE - The calculation of basic and diluted earnings (loss) per share was calculated for all periods in accordance with the requirements of Statement of Financial Accounting Standards No. 128, "Earnings per Share." The shares used in computing basic and diluted earnings (loss) per share were 11,809,653 shares for the three months ended June 30, 2001 and 2000. The calculations of earnings (loss) per share reflect the weighted average number of shares outstanding. 3. MEDICARE REPAYMENT PLAN - In May 2001, the Company obtained an amendment to its repayment agreement ("the Agreement") from the Federal Centers for Medicare and Medicaid Services ("CMS") (formerly the Federal Health Care Financing Administration) for the repayment of all excess PIP amounts and all audit liabilities relative to periods through February 28, 2001. The Agreement, as amended, revised the terms of a prior repayment agreement reached in December 1999, resulting in reduced monthly payments in earlier periods and an extension of the maturity date of the repayment plan. The Agreement, as amended, provides for aggregate monthly payments of principal and interest from June 2001 through May 2005. The required monthly payments are $750 thousand from June 2001 through February 2002, $1.0 million from March 2002 through November 2002, $1.5 million from December 2002 through May 2004 and $1.75 million from June 2004 through April 2005. Any remaining 7 8 liabilities as of May 2005 for periods covered by the Agreement will then be paid in a balloon payment, the amount of which is to be determined no later than March 1, 2005. Any overpayments or audit liabilities that are successfully appealed by the Company will be subtracted from the total amounts owed. Interest is accrued from the date of each assessment at the government rate of interest (currently at 13.75% per annum). United Government Services LLC ("UGS"), a fiscal intermediary for CMS, collects amounts due under the repayment plan by offsetting against current remittances due to the Company. 4. CONTINGENCIES - On December 21, 1998, H.L.N. Corporation, Frontlines Homecare, Inc., E.T.H.L., Inc., Phoenix Homelife Nursing, Inc., and Pacific Rim Health Care Services, Inc., former licensees (franchisees) of the Company for the territory comprising certain counties in and around Los Angeles, California and their holding company, instituted an action against the Company subsidiaries, Staff Builders, Inc., Staff Builders International, Inc. and Staff Builders Services, Inc., and certain executive officers of the Company in the Superior Court for the State of California, County of Los Angeles. The action was removed to United States District Court for the Central District of California on December 22,1998. Plaintiffs filed a First and Second Amended Complaint in the Central District on January 8, 1999 and September 1, 1999, respectively, to challenge the termination of the four franchise agreements between the Company and certain of the named plaintiffs. The plaintiffs are seeking damages for violations of California franchise law, breach of contract, fraud and deceit, unfair trade practices, claims under the RICO, negligence, intentional interference with contractual rights, declaratory and injunctive relief and a request for an accounting. The plaintiffs have not specified the amount of damages they are seeking. Discovery is currently in process. The Company is a defendant in several civil actions which are routine and incidental to its business. The Company purchases insurance in such amounts which management believes to be reasonable and prudent. Although the Company cannot estimate the ultimate cost of its open legal matters with precision, it has recorded a loss accrual at June 30, 2001 and February 28, 2001 for the aggregate, estimated amount to litigate or resolve such matters. In the opinion of management, the outcome of pending litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements appearing in Item 1. RESULTS OF OPERATIONS --------------------- Total revenues increased by $9.0 million, or 16.0%, to $65.7 million for the three months ended June 30, 2001 ("the 2001 period") from $56.7 million for the three months ended May 31, 2000 ("the 2000 period"). The increase in the Company's revenues is primarily due to an increase in the Company's Medicare revenues of $15.1 million to $42.4 million in the 2001 period from $27.3 million in the 2000 period. This growth is attributable to an increase in patient admissions as well as changes in the Medicare payment methodology under a Prospective Payment System ("PPS") which became effective October 1, 2000 for providers of Medicare home health services. Offsetting this increase is a decrease in non-Medicare revenue resulting from the Company's change in revenue mix by eliminating business with certain payor sources that represented minimal profits or poor cash flow. The following are the Company's service revenues by payment source:

Direct service costs were 51.2% and 62.0% of revenues for the 2001 and 2000 periods, respectively. The decrease in operating costs as a percentage of service revenues was primarily due to higher Medicare rates paid for services under PPS as compared to cost reimbursement previously received under the Medicare Interim Payment System ("IPS") which was in effect from March 1, 1998 until September 30, 2000. Additionally, the decreases in operating costs as a percentage of service revenues results from a change in revenue mix, as the Company complies with its objective to eliminate unprofitable and low margin business. General and administrative costs were $28.7 million and $22.0 million and were 43.7% and 38.9% of revenues in the 2001 and 2000 periods, respectively. The increase in general and administrative costs was primarily due to increased administrative salary costs, related in part to our sales force growth, and licensee distribution expense which results from higher gross margins. 9 10 Interest expense was approximately $4.6 million in the 2001 period as compared to $3.3 million in the 2000 period. The increase in interest expense in the 2001 period was primarily due to the increase in the level of borrowings under the Company's accounts receivable purchase program. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company finances its operations through an accounts receivable purchase program with an entity which provides health care accounts receivable financing. Under the program, the Company may sell to an affiliate of such entity up to $85 million of the Company's accounts receivable so long as the receivables meet certain qualitative and quantitative criteria and the Company is in compliance with the terms of the agreement. The balance of amounts outstanding under the Company's secured financing facility increased primarily as a result of the increase in the Company's accounts receivable. The Company's net trade accounts receivable increased by approximately $4.6 million to $76.0 million at June 30, 2001 from $71.4 million at February 28, 2001. This increase is due to an increase in Medicare receivables resulting from an increase in related revenue as well as a relatively high level of non-Medicare receivables to related revenue due to certain slow payors. The Company is taking significant steps to reduce the time it takes to collect accounts receivable including the establishment of de-centralized billing and service centers, changes in revenue mix toward more timely payors and expansion of a comprehensive, Company-wide quality assurance program to maximize the clarity and accuracy of all clinical and financial billing data. Management continues to pursue various strategies including, but not limited to, obtaining additional financing, cost reductions, change in revenue mix and negotiating with new and existing payor sources. The Company believes that cash provided from operations and its existing financing facility provides adequate funds for the Company's current level of operations and debt obligations for at least the next twelve months. RECENTLY ISSUED ACCOUNTING STANDARDS ------------------------------------ In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective December 15, 2001). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The effect of the SFAS No. 142 pronouncement on the Company's financial results is currently being evaluated. FORWARD-LOOKING STATEMENTS -------------------------- Certain statements in this report on Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are typically identified by the inclusion of phrases such as "the Company believes" and other phrases of similar meaning. These forward-looking 10 11 statements are based on the Company's current expectations. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The potential risks and uncertainties which could cause actual results to differ materially from the Company's expectations include the impact of further changes in the Medicare reimbursement system, including any changes to the current prospective payment system; government regulation; health care reform; pricing pressures from third-party payors, including managed care organizations; retroactive Medicare audit adjustments; and changes in laws and interpretations of laws or regulations relating to the health care industry. GOVERNMENT REGULATION. As a home health care provider, the Company is subject to extensive and changing state and Federal regulations relating to the licensing and certification of its offices and the sale and delivery of its products and services. The imposition of more stringent regulatory requirements or the denial or revocation of any license or permit necessary for the Company to operate in a particular market could have a material adverse effect on the Company's operations. The Federal government and Medicare fiscal intermediaries have become more vigilant in their review of Medicare reimbursements to home health care providers generally, and are preparing to conduct reviews of a greater number of health care claims with an increased focus on clinical procedures and related documentation. State and Federal enforcement officials also have increased their scrutiny of providers and are applying an increasingly expansive view of activities they believe to be fraudulent or abusive. Changes in the law and regulations as well as new interpretations enforced by the relevant regulatory agencies could have a material adverse effect on the Company's operations and the cost of doing business. Additionally, third-party payors have generally sought to contain costs by reducing payments and/or deferring payments to providers. Continued cost reduction efforts by third-party payors could adversely affect the Company's cash flow and results of operations. THIRD-PARTY REIMBURSEMENT AND MANAGED CARE. Because the Company is reimbursed for its services primarily by the Medicare/Medicaid programs, insurance companies, managed care companies and other third-party payors, the implementation of alternative payment methodologies for any of these payors could have an impact on revenues and profit margins. HEALTH CARE REFORM. A new prospective payment system ("PPS") became effective for all home health care agencies on October 1, 2000. Home health care providers have an opportunity to generate profits under PPS if costs are contained under the per-episode reimbursement amounts. However, unforeseen changes in health care reimbursement regulations could adversely affect the Company's ability to generate a profit under PPS. In addition, because PPS requires significant changes in billing methodology, the Company's systems may not be able to adapt immediately or sufficiently to all such changes. Further, Medicare fiscal intermediaries are implementing new systems which may result in slower payments than otherwise anticipated. 11 12 As Congress and state reimbursement entities assess alternative health care delivery systems and payment methodologies, the Company cannot predict which additional reforms may be adopted or what impact they may have on the Company. Additionally, uncertainties relating to the nature and outcomes of health care reforms have also generated numerous realignments, combinations and consolidations in the health care industry which may also have an adverse impact on the Company's business strategy and results of operations. BUSINESS CONDITIONS. The Company must continue to establish and maintain close working relationships with physicians and physician groups, managed care organizations, hospitals, clinics, nursing homes, social service agencies and other health care providers. There can be no assurance that the Company will continue to establish or maintain such relationships. The Company expects additional competition will develop in future periods given the increasing market demand for the type of services offered. ATTRACTION AND RETENTION OF LICENSEES AND EMPLOYEES. Maintaining quality caregivers, managers, branch administrators and licensees will play a significant part in the future success of the Company. The Company's professional nurses and other health care personnel are key to the continued provision of quality care to the Company's patients. The possible inability to attract and retain qualified nursing management and sufficient numbers of credentialed health care professionals and para-professionals as well as office management and information technology personnel could adversely affect the Company's operations and quality of service. SATISFACTORY FINANCING. Proceeds from the Company's financing program provided some working capital and the ability to pay portions of certain accumulated indebtedness. Under the financing program, the Company sells its trade accounts receivable. However, the financing facility is not obligated to continually purchase such receivables. The Company is limited to selling up to $85 million of eligible accounts receivable under the financing facility and such facility expires on December 31, 2002. The Company has negotiated deferred payment terms for certain of its Medicare and Medicaid liabilities and has made arrangements with many of its other creditors to either reduce its liability to them, defer and/or extend payment of the liability, or a combination of several of these steps. Management cannot provide assurance the Company's vendors will continue to extend credit. Pursuant to the Company's agreement with the Federal Centers for Medicare and Medicaid Services ("CMS") (formerly the Federal Health Care Financing Administration) to repay accumulated Medicare liabilities, the Company will be required to pay excess periodic interim payments received and Medicare audit liabilities on a monthly basis through May 2005. United Government Services LLC ("UGS"), a fiscal intermediary for CMS, collects amounts due under the repayment plan by offsetting against current remittances due to the Company. If no Medicare accounts receivable are available for offset as amounts become due under the repayment plan, then all amounts owed pursuant to this repayment plan may become immediately due and payable. 12 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (A) EXHIBITS Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, filed with the Secretary of State of Delaware on October 14, 1999. (A) 3.2 Amended and Restated By-laws of the Company. (A) NOTES TO EXHIBITS (A) Incorporated by reference to the Company's Form 10-Q (File No. 0-25777) filed with the Commission on October 20, 1999. (B) REPORTS ON FORM 8-K During the quarter ended June 30, 2001 no reports on Form 8-K were filed by the Registrant. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TENDER LOVING CARE HEALTH CARE SERVICES, INC. Dated: August 17, 2001 By: /s/ Stephen Savitsky --------------------------------- Stephen Savitsky Chairman of the Board, and Chief Executive Officer, (Principal Executive Officer) and Director Dated: August 17, 2001 By: /s/ Dale R. Clift --------------------------------- Dale R. Clift President and Chief Operating Officer Dated: August 17, 2001 By: /s/ Willard T. Derr --------------------------------- Willard T. Derr Chief Financial Officer, and Sr. Vice President, Corporate Controller and Treasurer (Principal Financial and Accounting Officer) 14

TENDER LOVING CARE HEALTH CARE SERVICES INC/ NY 10-Q