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Reprinted from: The SmallCap Investor's Stock of the Month - April 1997 Posted: March 31, 1997 NuMED Home Health Care, Inc. Nasdaq SmallCap: NUMD New Business Breathes New Life into Beleaguered NuMed. Hardy Home Health Care Company is an Excellent Value for Investors Seeking Turnaround Stocks. The last ten months have been pretty tough for nascent NuMED Home Health Care, Inc. (Nasdaq SmallCap: NUMD). After nearly three years of double and triple-digit revenue growth and a flattering buy-out offer, NuMED has been besieged by a number of setbacks which have resulted in a harrowing seventy-two percent decline in its stock price from a high of $4.31 per share in June 1996. The events which dominated the "fiscal year from hell" can, perhaps, be described as "bad luck", "bad timing" and even "ironic". Yet many of the forces which decimated shareholder value have come to pass and with in invigorating influx of new business on hand, NuMED may soon prove to be a bargain at today's prices. Clearwater, Florida based NuMED operates eight wholly-owned subsidiaries providing a broad range of health care related services. These services include comprehensive home health care services, temporary staffing of nursing personnel and long-term staffing of physical therapists, occupational therapists and speech/language pathologists to hospitals, clinics, long-term care facilities, physician offices, etc. NuMED's business is part of a growing market driven by the general aging of the U.S. population, a rising focus on cost effective use of health care dollars and the increased use of treatment at home as an alternative to hospitalization. Since hospitals receive fixed Medicare reimbursements based upon a patient's diagnosis, regardless of the cost of service or length of stay, there is an incentive is to minimize the length of patients' stays and increase the use of home health services. Additionally, advances in medical technology have enabled more treatments to be provided on an outpatient basis, or in the patient's home, nursing homes, or clinics. The result is a shortage of qualified medical personnel, administrative staff and other related services which NuMed provides. And, until recently, things were going pretty well for NuMED. Between March 31, 1993 and March 31, 1996, NuMED was able to accomplish a fivefold increase in its revenues due to internal growth and and strategic acquisitions. For the fiscal year ended March 31, 1996, net revenues increased 158% to a record $24.1 million. Net income for the period was a record $0.02 per share. Excluding non-recurring expenses, net income per share would have been $0.06. Cash flow per share for the 1996 fiscal year increased to $0.15. In the optimistic words of NuMED's Chairman and CEO, Jugal K. Taneja, "NuMED turned the critical corner to profitability in fiscal 1996 and intends to continue to improve its margins and profitability throughout fiscal 1997." But that was just before NuMED ran into several problems which had a negative impact on revenues and earnings. Bad News Buy Out The first thing to go wrong for NuMED was, ironically, a May 1996 offer to buy 80% of NuMED's shares for $4.00 per share, a significant premium over it's then current price. The offer came from CCF Health Care Ventures Inc., an affiliate of the Cleveland Clinic Foundation, a primary care facility in Cleveland. In August 1996, after carefully evaluation, NuMed's board of directors announced that it would not enter into this deal. To the contrary, the potential sale of the company proved extremely disruptive to NuMED's business. New contracts, as well as existing business, were negatively impacted by the possibility of the merger. Many of the centers where NuMED provided staffing also did business with competitors of CCF. These centers began to fear that they would lose the business of CCF's competitors if CCF acquired NuMED. Furthermore, many of NuMED's customers preferred to do business with a small, high quality company like NuMED rather than a large hospital based firm. As a result, NuMED lost eight fairly large contracts and had difficulty gaining new business during the period in which they were considering the offer. NuMED's home health care business also suffered as weekly visits of home health nursing, aides, and therapists dropped from 2,100 per week to 1,300 per week in just five weeks. Consequently, not only did NuMED have to write off the legal and professional fees incurred as a result of unsuccessful negotiations with CCF, but it also suffered a loss of revenues. In addition, the talks with CCF forced NuMED to delay the installation of a management information system intended to increase efficiency and competitiveness. To add to NuMED's woes, one of its key customers underwent a routine Medicare audit which claimed that a NuMED subsidiary overcharged for certain services resulting in disallowed costs of $2.1 million. While NuMED immediately challenged the audit, and was successful in reducing the amount of disallowed costs by more than half, the company was forced to repay $899,000 which amounts to approximately $0.18 per share. Then, to make matters worse, the mix of revenue between occupational, physical, and speech therapy shifted during 1996 with a larger percentage of revenues going to physical therapy, which generally yields lower gross margins than either occupational or speech therapy. And to top things off, NuMED was named as a defendant in a class action litigation, resulting in further legal expenses. Yet, in spite of the setbacks of fiscal 1997 (ending March 31, 1997) and while the currently languid stock price of NUMD may suggest otherwise, evidence of a "bona-fide" turnaround appears to be abundant. Good News Returns In late July, the lawsuit was dismissed. NuMED is also vigorously pursuing an appeal to recover disallowed Medicare costs for 1996. Management is optimistic that NuMED could recover as much as $702,000 or approximately $0.14 per share. Meanwhile, the company is actively pursuing more profitable types of contracts to offset the mix of revenues which shifted during 1996. But, more importantly, subsequent to ending talks with CCF, NuMED has steadily gained new business to make up for the contracts it lost. NuMED has now successfully obtained 20 new contracts in its Rehabilitation and Home Health Care divisions. The full impact of this new business is expected to become evident in first quarter ended June 30, 1997. Weekly visits for NuMed's subsidiary Total Professional Health Care, which had dropped to 1,300 per week, have recovered to 2,000 per week. NuMED is now at nearly the same level of business as it was before the talks with CCF. Additionally, NuMED plans to announce soon that it has been awarded a very large contract to provide managed care in five Florida counties including two where NuMED did not yet have a presence. Susan J. Carmichael, the president of NuMED, stated, "We are very excited about being chosen as a chief preferred provider for this managed care organization. This attests to the fact that we are appropriately focused in our commitment to cost containment, quality care, and information technology." The contract is expected to bring in between $1.5 and 2 million in additional revenues. Based on this information, management feels that NuMED can return to profitability in the new fiscal year. Other promising events include a recently received accreditation with commendation in Pennsylvania which has already led to increased business, potential accreditation in the other markets, the institution of cost cutting measures including the consolidation of the company's finance and administrative offices and the installation of a Management Information System (MIS) which together should save NuMED between $100,000 and $200,000 per year. The new MIS will also make NuMED more competitive and will allow NuMED to handle 30% more business without increasing administrative staff. While the company is likely to again have a small loss in the fourth quarter, NuMED's outlook is very positive and the company could return to profitability as early as the first quarter. Sharing this confidence, NuMED repurchased 100,000 of its own common stock in open market transactions in August. In October, NuMED's CEO bought 4,000 shares increasing his ownership to 1,615,864 shares and other senior officers have been buying shares under NuMED's stock purchase plan. And, more recently, in March 1997 NuMED signed a definitive purchase agreement to acquire all the assets of Alcar West Enterprises Inc. Alcar should contribute approximately $1.0 million in revenues. In light of these recent accomplishments, and trading at just 25% of revenues and 75% of book value, NuMED is an excellent value for a fundamental turnaround currently in progress. Once investors realize that NuMED has overcome various setbacks encountered in 1996, shares of NUMD could rebound significantly from its current multi-year low. Trading at just $1.31, NUMD could potentially rise 50% to 100% by the end of summer 1997. For Investors seeking to profit from turnaround opportunities in a micro-capitalization stock - be aware - shares of NuMED at these prices may not last much longer. Nasdaq SmallCap Symbol: NUMD Price on date of report: bid: $1.19 ask: $1.31 52 Week Range: low: $1.13 high: $4.31 Shares Outstanding: 4,913,916 Approx. Float: 3,400,000 Market Value: $5,835,275 Cash and Equivalents: $664,059 Working Capital: $3,866,000 For continuing coverage and moderated discussion of NuMED, please visit The SmallCap Investor at: financialweb.com Copyright c 1997 Axxess, Inc. All rights reserved. This report does not represent an offer to buy or sell securities and is provided for informational purposes only. The information in this report was obtained from sources believed to be reliable, however, Axxess, Inc. cannot guarantee its accuracy. This report is not intended to be a complete description of NuMED Home Health Care, Inc. Readers are advised to consult with their own independent tax, business and financial advisors with respect to any investment, including any contemplated investment in the company featured in this report. All information contained in this report should be independently verified with the featured company and by an independent financial analyst. You should independently investigate and fully understand all risks before investing. Employees of Axxess, Inc. may, from time to time, buy or sell securities mentioned in The SmallCap Investor. | ||||||||||||||
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