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Arcadia Resources, Inc. (KAD)

F4Q08 Earnings Call

June 16, 2008 11:00 am ET

Executives

Michelle Molin – Executive Vice President, General Counsel

Marvin Richardson – President. Chief Executive Officer

Matthew Middendorf – Chief Financial Officer

Analysts

Sheryl Skolnick – CRT Capital Group

Mark Fitzgerald – [Wilmot Advisors]

Kevin Ellich – RBC Capital Markets

Operator

Greetings and welcome to the Arcadia Resources Inc. fourth quarter results. (Operator Instructions) It is now my pleasure to introduce your host, Michelle Molin, General Counsel for Arcadia Resources Inc. Thank you, you may begin.

Michelle Molin

Thank you Ryan and thanks to all of you for joining us today. I’m Michelle Molin, Executive Vice President and General Counsel for Arcadia Resources and I'd like begin by reading our Safe Harbor language before we proceed.

Our presentation today will include forward-looking statements involving both known and unknown risks, assumptions, uncertainties and other factor which could cause actual financial or operating results to differ materially from those forecasted.

Forward-looking statements are not guarantees for future performance. Important factor that could cause actual results, developments and business decisions to differ materially from the forward-looking statements are described in the company's filings with the Securities and Exchange Commission from time to time, including the section entitled risk factors and also in the company's most recent annual report on form 10-K for the year ended March 31, 2008.

The forward-looking statements speak only as of the date hereof. The company disclaims any obligation to update or alter its forward-looking statements except as may otherwise be required by law. With that you will here from Marvin Richardson, President and Chief Executive Officer and then Matt Middendorf, Chief Financial Officer of Arcadia Resources. Marvin, please go ahead.

Marvin Richardson

Good morning, thank you for joining us on today’s fourth quarter and fiscal year end 2008 conference call. With me today is our Chief Financial Officer, Matt Middendorf. As most of you have read with this morning’s press release, our performance was much improved this year, specifically, the second half of the year.

To understand how significant these results are, you need only go back a year as this company was not cash flowing, was not EBITDA positive and was engaged in business lines not complimentary to our core business. In addition, there was a considerable buildup in accounts receivable in the home healthcare equipment division that led to a significant write down and there were large goodwill impairment charges related to that business.

All of this led BDO Seidman to issue a going concern opinion at yearend audit. We are very excited to report strong fourth quarter results and a much healthier company at fiscal 2008 yearend. We now have two consecutive quarters of positive cash flow from operations, two consecutive quarters of positive EBITDA from continuing operations and $6 million of cash on the balance sheet at the end of fiscal 2008.

In addition, our independent auditors, BDO Seidman have issued an unqualified audit opinion for the company’s fiscal 2008 yearend financial statements, removing the going concern issue included in last year’s audit opinion. BDO Seidman has also agreed with management’s conclusion that there were no material weaknesses in the company’s financial controls.

During the past year, the company has refocused its business strategy to support its overall vision of keeping people at home and healthier longer. Population demographics, the projected demand for in home health care and the need for more effective management of medications are key drivers behind this focus.

The company’s services and products are organized into two complimentary groups, home healthcare and staffing and pharmacy and medication management. Within these two groups are three business segments: homecare and staffing services, home health equipment and pharmacy.

Today, at fiscal yearend, I am comfortable that we have a much improved company and a very bright future for Arcadia Healthcare. I am pleased to state that in fourth consecutive quarters of fiscal 2008, we have delivered on the results we committed to our shareholders during our quarterly calls.

Specifically, on our third quarter 2008 call, we told you we were going to focus on five key initiatives. And I’ll report on the general progress of each. Matt Middendorf will then provide specific year over year details.

First, as previously mentioned, we generated positive cash flow from operations and positive EBITDA from continuing operations in the fourth quarter. Second, our pharmacy segment revenues grew 65% year over year and we’ll discuss progress with our DailyMed product in further detail in a moment.

Third, we remained focused on growth in our core homecare and staffing businesses. This segment of our business includes homecare, home health equipment and products, medical staffing and non-medical staffing businesses. Overall sales in these businesses grew 3.3% in fiscal 2008 versus 2007.

This was achieved despite weak market conditions during much of the year in several of our key per diem medical staffing markets, including Florida, California and New England. Our two regionally focused home health equipment businesses in the Midwest and Southeast experienced both increased sales and improved margins versus the prior year.

Q4 sales were above the same quarter a year ago as increased sales in our homecare and home health equipment and products businesses were offset by lower sales in the medical staffing sector. Overall, gross margins remained steady in 2008 at 34.2%. These positive factors were offset by higher sales in some of our lower margin segments such as travel nursing and non-medical staffing.

We also made considerable quarter progress on the fourth and fifth initiatives related to SG&A reductions and accounts receivable collections. Matt Middendorf will comment on the progress related to these initiatives later in today’s call.

In addition to these five initiatives, we took significant steps towards implementing our Board approved financing strategy which is designed to improve our financial flexibility, improve our capital structure and provide additional resources to invest in the growth of our business.

Early in the fourth quarter, we announced the extension to October 2009 maturities on $32.5 million of debt with the JANA Master Fund and Comerica Bank. Then on March 31, 2008, we closed on a $5 million debt financing deal which will provide us with additional capital for growth of DailyMed and other initiatives in fiscal 2009.

Now let’s turn to our second initiative, which is growing our pharmacy segment. On May 20, 2008, we announced the official start of the Indiana Medicaid CareSelect Program to offer enrollment to approximately half of the state’s 70,000 homebound Medicaid patients, focusing on those with the most serious medical needs.

We then completed the balance of the enrollment offer for the other half of the state’s 70,000 homebound Medicaid patients on June 4, 2008. While we had hoped to implement the CareSelect program by April 1, 2008, we are excited to have the enrollment program underway with prescriptions being filled as we save Indiana taxpayers significant dollars on prescription drug and healthcare costs.

We have been tracking the results from the CareSelect program and are pleased to report initial enrollment is in line with expectations. Additionally, albeit very early data, we are pleased to share with you an estimated drug spend savings to the state of Indiana in the range of $500 per patient per year for the initially enrolled DailyMed members which outcome is similar to the EverCare pilot.

An important part of the DailyMed program is that the DailyMed team provides clinical consultation and oversight to each enrolled member. By providing this service as part of our DailyMed program, our pharmacists look to eliminate duplicate therapies, reduce successive therapies and use more cost effective drugs to treat a particular disease state.

Such medication mismanagement is typically a result of patients using multiple physicians and specialists as they seek treatment in managing their conditions. We will look forward to obtaining research from additional studies which we anticipate will document the drug savings and additional healthcare savings associated with better medication compliance, such as reducing hospitalizations and long term care admissions.

In total we believe such savings from reducing drug spend and healthcare costs combined with the improved pharmaceutical care will allow us to continue to build the DailyMed momentum with the state of Indiana as well as other healthcare payers. Additionally, we’ve previously announced that EverCare, a division of United Healthcare had agreed to expand its DailyMed pilot program to a broader patient base in Minnesota.

As such, we have started filling more DailyMed prescriptions with this population in Minnesota starting in the month of April. Again, EverCare manages the healthcare of high risk dual eligible seniors throughout the state of Minnesota and nationally Evercare overseas 150,000 lives in 38 states.

In recent months we have had many shareholder and investor requests around our pharmacy revenues. First, let me preface my remarks by saying that due to confidentiality agreements and understandings with these payers, we’re unable to disclose specific information about these programs, including the number of patients, the number of prescriptions and specific program revenues.

Second, for competitive reasons, we wouldn’t want to make certain specific information public. Obviously, based on our recent announcement, we started the Indiana Medicaid program later than planned. In addition, the EverCare rollout in Minnesota started roughly a month later than planned.

Neither of these occurrences was a result of DailyMed not being ready, but rather resulted from Federal and State government requirements on marketing materials, bilingual call centers, HIPAA compliance and various approvals. That being said, we are somewhat behind our estimated start dates of March 1 and April 1, 2008 for EverCare and Indiana Medicaid respectively.

Another note, as referenced is that specific to DailyMed revenues and our start dates, once a patient enrolls in the program, it typically takes us an average of 35 days to synchronize a patient’s full regimen of medications because of the prescription drug coverage associated with their insurance provider.

As such, revenues are not fully recognized until a patient is fully integrated into the DailyMed system which again is approximately 35 days. Recognizing this slight delay in implementation, we will provide our shareholders with an update on our pharmacy revenue number for fiscal 2009 once our first quarter fiscal 2009 results, ending June 30, are released in early August.

Again, since our DailyMed program started in the first quarter 2009, it would be difficult to give shareholders specifics at this time. We continue to believe that the trends in the US healthcare market are extremely favorable for Arcadia. Allowing people to stay in their homes and stay healthier longer is a key objective of both consumers and payers.

There is also the need to provide solutions that make life easier for the millions of primary care givers in our society. We continue to position Arcadia to serve these needs going forward. In closing, I thought it would be helpful to review our fourth quarter performance today versus our fourth quarter a year ago.

First, we improved fourth quarter year over year revenues by 8%. Second, we improved fourth quarter year over year cash flow by $3.1 million. Third, we improved fourth quarter year over year EBITDA by $7.9 million. Fourth, we improved fourth quarter year over year net loss from continuing operations by $26.8 million, narrowing to a $2.9 million loss.

We eliminated the going concern issue from our auditor’s opinion, we eliminated the three material weaknesses in our financial controls. And finally, we had no additional goodwill impairment in fourth quarter 2008.

While we are proud of our accomplishments this past year, we understand that our ultimate goal is positive net income as well as continued positive cash flow. We’ll continue to stay focused and work hard on building our company into one that our shareholders, our associates and our affiliates will be very proud of.

We’ll look forward to reporting on our progress for the first quarter of fiscal 2008 in early August. With that, I’d like to turn the call over to Matt Middendorf for a detailed review of the fourth quarter and yearend financial results. Thank you.

Matthew Middendorf

Thanks Marvin and good morning everybody. At this point you should all have a copy of our press release and our form 10-K which we filed before the market opened this morning. In a few minutes I will discuss the financial highlights from our fiscal fourth quarter and fiscal year ended March 31, 2008.

First, I’d like to make a few comments about our yearend audit. I’m very pleased with our audit opinion in year two Sarbanes-Oxley result. As Marvin mentioned, the going concern wording included on our prior year audit opinion was removed. We believe this was a direct result of our successful implementation of our fiscal 2008 strategy.

We also believe that this is a good estimation of our financial stability and our plan moving forward. Also, you may remember from last year that we disclosed three material weaknesses in our form 10-K after our first year in SOX. This year we had no material weaknesses.

Considering the amount of change that occurred during the year, this is a major accomplishment, I’m very proud of our year two results. While we have a long ways to go and a lot of hard work ahead of us, the removal of the going concern opinion in our SOX result is a solid confirmation of the progress we made during the year.

I’ll turn my discussion towards our financial results. My comments will cover the following: our fiscal 2008 fourth quarter results versus our fiscal 2008 third quarter results as well as our annual results compared to the prior year.

Since Marvin spent some time earlier talking about our fourth quarter year over year results, I won’t provide further discussion. The current year Q3 versus Q4 comparisons provide more useful insight into our operational improvements and trends.

Before I get into the details, I’d like to take a moment to briefly touch on our presentation as it relates to discontinued operations. You may recall from our last quarterly call, during the second and third quarters this company disposed of certain business operations, most notably our care clinics as well as certain portions of our home health equipment business.

The financial results of the businesses that were closed or sold are reported in discontinued operations for the quarter and the year ended March 31, 2008. The prior period results have also be recast. There were no additional business disposals or closures during Q4 and we do not anticipate any material changes in the near future.

Now I’d like to discuss the results for our fourth quarter. First, we had positive EBITDA from continuing operations for the second consecutive quarter. EBITDA for Q4 was $157,000. EBITDA from continuing operations for the second half of the fiscal year totaled $388,000.

As always, I’d like to stress that EBITDA is a non-GAAP measure, but is a metric used by our management on a regular basis. While we were happy with the improvements that we made in Q3 and Q4 of fiscal 2008, our ultimate goal is to achieve positive net income over time.

Revenues for the fourth quarter of $37.4 million were essential unchanged from the third quarter revenues of $37.5 million. Despite the flat revenue, gross profits for the fourth quarter increased to $13.3 million from $12.4 million, an increase in gross margin percentage of 2.4%.

The increase in the quarter over quarter gross margins was primarily due to adjustments within the home health equipment segment. SG&A expense were $13.5 million in the quarter ended March 31, compared to $12.7 million for the quarter ended December 31.

The $800,000 increase quarter over quarter was due to several seasonal and onetime charges, most significantly severance charges related to three former executives, the timing of consulting fees associated with satisfying our SOX requirements and our yearend audit costs, the majority of which were expensed during the fourth quarter and the first quarter of the subsequent year.

Despite the quarter over quarter increase in SG&A, we believe our fourth quarter results, when normalized, represent continued progress in cutting SG&A expenses while maintaining the infrastructure necessary to support the DailyMed initiative.

Depreciation and amortization was $937,000 during the fourth quarter which was a modest increase from the previous quarter. Interest expense increased to approximately $1.3 million during the quarter from $925,000 during the previous quarter due to some costs associated with the termination of a line of credit.

Our net loss from continuing operations was $2.9 million compared to $2.3 million for the quarter ended December 31. Some additional costs associated with our discontinued operations added $151,000 in losses to arrive at a total net loss of $3.1 million for the fourth quarter. This compares with total net loss of $3.7 million for the third quarter.

Now, I’d like to discuss our full year results compared to the prior year. For the year ended March 31, 2008, net revenues from continuing operations were $151 million versus $144 million for the prior year. Acquisitions in our pharmacy and HHE segments during fiscal 2007 and 2008 accounted for $4.7 million of the increase, the remaining $2.6 million coming from organic growth with our existing operations.

Gross profit for fiscal 2008 was $49.7 million, an increase from fiscal 2007 gross profit of $45 million. Margins increased by 1.6% year over year. This increase reflects the continued change in the revenue mix as we generate more revenues from the HHE and the pharmacy segments which have higher margins.

Additionally our margins improved in the HHE segment as we worked through many of the integration and licensure issues that we experienced subsequent to various acquisitions made in the prior year.

SG&A expenses for the year from continuing operations were $54.3 million versus $53.2 million in the prior year. Excluding an increase in SG&A expenses stemming from recent acquisitions, primarily within the pharmacy segment, this actually represents a decrease in SG&A expenses year over year.

Total SG&A expenses, including continuing and discontinuing operations decrease approximately $3.3 million year over year. While we made significant improvements in reducing costs during fiscal 2008, we believe that there are additional opportunities for SG&A reductions specifically in the following areas.

Further reductions in professional fees, including our SOX costs. Centralizing our purchasing department and efforts to reduce costs of all external purchases and services. Taking a hard look at underperforming offices where revenues do not justify the incremental SG&A expense. Continued improvements in our back office support functions, including our HHE billing center.

Turning back now to P&L, depreciation and amortization increased to $3.6 million from $1.7 million in the prior year primarily due to fixed assets acquired an intangible assets created through the acquisitions.

Interest expense of $4.4 million for the year was an increase from the prior year amount of $3.6 million due to higher average debt balances throughout fiscal 2008 compared to 2007. For the year ended March 31, 2008, the net loss from continuing operations was $13.1 million or $0.11 per share versus a net loss of $33.6 million or $0.33 per share for the prior year.

Prior year net loss includes a goodwill and intangible asset impairment charge of [inaudible] million within our home health equipment business. Including discontinued operations, total net loss for fiscal 2008 was $23.4 million versus a fiscal 2007 net loss of $43.8 million.

Turning now to the balance sheet. First of all, I’d like to point out that similar to the income statement, the March 31, 2007 balance sheet declassifies the assets and liabilities associated with the discontinued operations. On March 31, 2008, we had $6.4 million in cash. This amount includes the $5 million of cash that we received through the additional debt financing in late March.

Accounts receivable decreased during the year to $24.7 million from $26.4 million at the end of last year. As I mentioned previously, we had some issues subsequent to certain HHE acquisitions in prior years that had a negative impact on our HHE collection efforts. During fiscal 2008 we worked through these issues and we are now back on track.

I should mention that at March 31, receivables from our HHE segment represented $4.3 million or approximately 17% of our total AR. I mention that only to stress that the bulk of our receivables are generated from our services segment which had not experienced the same types of issues over the last few years as the HHE segment.

Goodwill at March 31, 2008 totaled $32.8 million which represents 33% of our total assets which were just under $100 million at March 31, 2008. Now I’d like to mention certain changes tour liabilities.

Total debt, including lines of credit and capital lease obligations decreased from $46.9 million to $39.4 million year over year. The mix of current versus long term debt also changed significantly during the year. At the end of last year we had approximately $24 million of current debt.

During the year we paid off a large portion of this debt and we were able to extend the maturity of our debt with JANA Master Fund and Comerica until October 2009. Also as mentioned previously, we have obtained an additional $5 million of debt financing in later March of this year. This cash has provided us with the additional capital necessary to grow our pharmacy business during fiscal 2009.

Moving now to the equity section, common shares outstanding at March 31, 2008 were 133.1 million. This represents a net increase of 12.1 million shares since the beginning of fiscal year. We refer you to the statement of stockholder’s equity and the corresponding footnotes on our form 10-K for more detail surrounding specific equity activities during the year.

Finally I’d like to make a few brief comments about our cash flow statement. As a general point, unlike the P&L and the balance sheet presentation, the cash flow statement does not isolate cash used in discontinued operations. Rather it represents all cash flow activities in total.

Specifically, fiscal 2008 cash flows from operations were a negative $7.1 million compared to $13.8 million for the prior year. Obviously the total net loss for both years was the key driver behind the large negative cash flow from operations. Positive cash flows in both Q3 and Q4 reflect our overall improvement in net earnings as well as some working capital improvements.

Q4 was our second consecutive quarter of positive cash flow from operations. In summary, we are pleased with the improvements we’ve made during the past year. These improvements have left us well positioned to grow revenue during fiscal 2009 while at the same time continuing to reduce costs wherever possible. Our ultimate goal is to build a strong and profitable company.

Now I’ll turn it back over to Marvin for some closing comments and then we’ll open it up for questions. Marvin.

Marvin Richardson

Thanks Matt. Judging by today, this was the highest number of participants that we’ve had on a conference call since I joined the company, so I’d personally like to thank all of you for your interest. And I’d particularly like to thank the shareholders and debt holders and investors and analysts who continue to have interest in Arcadia as we move forward in 2008.

We’re humbled by this support and interest, we’re committed to work hard this year to deliver on fiscal 2009 to continue to improve our performance even more than we have in 2008 and to drive revenues, particularly in the DailyMed segment. And at this time, I’d like to open it up for any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Sheryl Skolnick – CRT Capital Group.

Sheryl Skolnick – CRT Capital Group

I missed what you said about what data points you can provide to us, I know you said you’d provide us an update with the first quarter results, but what data points can you provide us about the progress being made in DailyMed?

Marvin Richardson

When first quarter completes at the end of June and we have an opportunity to really assess what the Indiana Medicaid program will look like, the issue we’ve got obviously is that we’re four weeks into the first half of these patients and two weeks into the second, so we only have three weeks with Indiana Medicaid.

As we close June, have more time going to the August call, you know we’ll certainly give the revenue numbers overall for the pharmacy segment and probably will be able to provide some color in terms of numbers of medications and revenues for a patient for example. What we won’t do is breakdown revenue segments by plan because of some confidentiality agreements and things that we have in place.

Sheryl Skolnick – CRT Capital Group

My next question is, as you grow the DailyMed and pharmacy revenues generally, what’s likely to happen to your gross margins? Is that a higher or lower margin business than the rest of your business?

Matthew Middendorf

The pharmacy business is a higher margin business. So obviously as the mix changes, we should see on a consolidated basis margins will improve.

Sheryl Skolnick – CRT Capital Group

And that’s true at the gross margin level as well as the EBITDA?

Matthew Middendorf

Correct.

Sheryl Skolnick – CRT Capital Group

If I remember correctly, you had talked about I think it would be reasonable for us to think about of the 70,000 lives that you’re penetration of those lives in the first year would be more modest than 100%, along the lines of 10% or 7,000. And then you indicated that your penetration in enrollments in the first wave seem to be on plan and obviously you haven’t told us what that plan was.

So unless we’re on track to do 7,000, so I guess my question is, what’s your thoughts about the 7,000? Is that too low, too high, just right? And is that for a full year of fiscal 09 or there might be opportunity to be larger and therefore your penetration would be larger in the year?

Marvin Richardson

It’s difficult for us to sort of predict at this point in time what the overall percentage or penetration of the plan will be. Obviously it will ramp up by quarter. So it will start, in effect on May 20 we started at zero and it will go for obviously a period of time, may even be longer than a year that we ramp up to some percentage.

10% is probably optimistic given we’ve said publicly before that an average DailyMed patient is about $6,000 worth of revenue, that’s a pretty big number. But I think we’ll have more visibility and more color to that once we start to get into two or three months of implementation in the program.

Sheryl Skolnick – CRT Capital Group

You also said that the EverCare pilot was delayed, I gather not because you weren’t ready but just because this is the time it takes for those things to actually happen. With EverCare, they have nationally 135,000 lives, but within Minnesota, can you give us a sense of how many lives you might be expecting to penetrate there?

Marvin Richardson

There’s roughly 8,000 lives in Minnesota and we started about 30 days later than we’d like, we thought we would start with them on March 1, we started April 1. But there are 8,000 lives that we are working with case managers for. I mean typically the way this works is a case manager is managing the care of either an EverCare or an Indiana Medicaid patient.

So the conversation is such that both the Indiana Medicaid patient and the EverCare patient, EverCare and Medicaid are at risk for that patient’s overall healthcare spend, including pharmacy.

So what they try to do as case managers is intervene on behalf of the patient. So they might say, an example would be, you know Marvin if you get sick, don’t go to this hospital emergency room. Call me and I will get you a nurse or I will get you medications or I’ll get you whatever you need to be helpful.

So it’s the case managers that we work with that we’re dealing with in terms of converting over to DailyMed, particularly with EverCare since we have a long history with them. We’ve been with them for over a year now. They like what DailyMed is doing for that patient population in terms of reducing medication costs but more importantly improving care so that they don’t cost shift into hospitals.

And that helps United Healthcare in terms of their at risk if you will on this. So we had a total opportunity of about 8,000 patients and I think we’ll have a better indication of what our penetration rates will be relative to that patient population in the first quarter as well.

Sheryl Skolnick – CRT Capital Group

And is their case manager actively encouraging the member?

Marvin Richardson

Yes, we actually train the case manager. So the people that we’re working with on the Indiana Medicaid side and on the EverCare side are case managers. We work with them and we’re solving a problem for them which is helpful. So obviously these are the people that we’re working with on a daily basis and training in terms of the DailyMed product.

Matthew Middendorf

May I make one clarification? As the DailyMed revenue grows and the pharmacy revenue grows for the company, obviously the margins will go up. But the EBITDA may not necessarily grow initially as the pharmacy revenue grows because there is a cost associated to bring on new patients.

Eventually the EBITDA will grow but initially as we ramp up and what we’re primarily focused on is the growth on the revenue side. It may take a while for the EBITDA to catch up.

Sheryl Skolnick – CRT Capital Group

So I really want to make sure that I understand this because that might be a little bit disappointing or it might just simply make sense. So are you saying that there’s some sale issues here?

First there’s the issue of the customer acquisition cost, the second there’s the issue of just taking your organization, your actual pharmacy sales and getting it to an optimal capacity utilization. So is it that you incur the cost to bring the patient on and then you don’t get the margin leverage of having optimal capacity utilization until you actually are at scale?

Matthew Middendorf

What I’m trying to say, bringing a customer, a patient on initially has a cost associated with it. Once it’s up and running we’ll start to generate the recurring revenue from that patient, which is obviously where the EBITDA will come from.

Marvin Richardson

I think the analogy would be the most expensive fill on DailyMed is the first one. The pharmacists is involved reviewing drug therapy, making choices, once that’s sorted out and we begin to actually fill prescriptions, then the refills become much more profitable for us because we’re not engaged [inaudible].

Sheryl Skolnick – CRT Capital Group

So this is a typical business startup, business launch kind of scenario, there’s not anything unusual going on here?

Matthew Middendorf

That’s correct.

Sheryl Skolnick – CRT Capital Group

At some point, wouldn’t you expect your customer acquisition costs to begin to decline on a per member basis?

Marvin Richardson

Yes, clearly.

Sheryl Skolnick – CRT Capital Group

But that would be in the out years?

Marvin Richardson

Yes.

Sheryl Skolnick – CRT Capital Group

As you get leverage from your reputation, it becomes easier to acquire more business?

Marvin Richardson

Absolutely.

Sheryl Skolnick – CRT Capital Group

Can we talk about the rest of the business a little bit? In your not home DME but in your home health nursing, are you exposed to the new Medicare reimbursement rules for home health and if so what impact has that had on you?

Matthew Middendorf

We have very little Medicare revenue in that piece of the business. So our exposure to Medicare issues is definitely more on the HHE side than the home care side. Nominal, less than 1% Medicare revenue on the homecare side.

Sheryl Skolnick – CRT Capital Group

Right, and on the, and now let’s talk about the HHE side of the business. Are you in any, one of the thing that’s afoot in Congress, obviously is to delay the competitive bidding for oxygen and it sounds like to take some of the pressure off home DME to begin, broadly, it sounds as if there’s beginning to be some move there that may be [inaudible] in Congress has pushed on that enough.

Are you, how exposed are you, A, to competitive bidding in your business for home DME or home oxygen and I think the answer to that is not at all or not much and you’ve gotten rid of most of where you would have been. And then second, what is your anticipation for your expectation for pricing in that business?

Marvin Richardson

I think we have a pretty good mix of payers across the HHE business at least for fiscal 2009, we don’t see any material impact from competitive bidding. Right now to date we’ve had one location that we’ve been affected by competitive bidding, and it looks like we’ll have three or four more of those the next round.

So that’s clear, and then obviously the capsule impact that and we’re hearing the same thing that you’re hearing about what’s going on in Washington. So we’ll see, we’ll probably see some pricing pressures. 2010 I think will give us more color as to where we’re going, but we’re developing plans on how to handle that. But today at least, for fiscal 2009, we don’t see a material impact of that.

Operator

Your next question comes from Mark Fitzgerald – [Wilmot Advisors].

Mark Fitzgerald – [Wilmot Advisors]

Could you go through what’s going to be done on the capital spend side to support this in terms of new facilities coming up, spending, is there any plans that you can lay out for us?

Marvin Richardson

We will build a DailyMed pharmacy if you will in Indiana of some sort. We’re not sure what that’s going to look like and what we’re going to do in terms of that particular pharmacy. And right now we have a management agreement in place with a pharmacy in Indiana that is contractually filling DailyMed for us.

That seems to be working very well, we continue to talk with them about how that’s working for them as well. But as some point in time, we’ll do that. Overall the cap ex for this is not, it’s not a large number.

You know the systems and the processes that we’ll need to put in place, we feel we’ve got sufficient capital within this new capital structure we have to support that build. But clearly what will happen over the next few months is we’ll identify a pharmacy site in Indiana to fill DailyMed prescriptions that will be a DailyMed pharmacy.

Mark Fitzgerald – [Wilmot Advisors]

You talked about in the past $40 million in DailyMed for this fiscal year that we’re in, is the slow startup in these markets, does that impact that number at all in terms of making it more difficult to achieve?

Marvin Richardson

It may, that’s really what we want to be able to look at and give more color on in August. I think once we’ve had the opportunity to get ten to 12 weeks of prescriptions filled under the Indiana Medicaid program, we’ll sort of have a better sense of what if any effect there is on that overall pharmacy revenue number for fiscal 2009.

Obviously we would have loved to have gotten started earlier but when you’re dealing with Federal and State governments on approval, sometimes they don’t move as fast as you’d like them to. So we’ll have better visibility to that, better color on that in August.

Mark Fitzgerald – [Wilmot Advisors]

You talked about $6,000, you referenced it earlier as kind of the average for the DailyMed patient, with the startup patients that you have in the pipeline, is that number good or is it higher or lower at this point?

Marvin Richardson

I think we’ll know more about that and have better information on that in August when we have our call. You know that’s based on the average number of medications of eight medications per patient. And obviously the Indiana CareSelect program group are high acuity patients with lots of pharmacy spend.

So I think once again, once we get into 12 weeks of experience in sort of prescriptions filled under our belt, we’ll have a pretty good idea of how that relates to the overall revenue for the program.

Mark Fitzgerald – [Wilmot Advisors]

The industrial staffing business, I mean does that fit long term with the company’s business plan or is that a potential source of capital down the road?

Marvin Richardson

We’ve actually said publicly that we’re going to divest or look at divesting of non-strategic assets over time. Right now that particular segment is growing, it’s profitable, its cash positive. And we’re very happy with it if you will. But as we continue to move down the road, we’ll certainly continue to evaluate that. It’s certainly not in our vision of keeping people at home and healthier longer, obviously, but it has performed very well, that segment of the business in the past.

Operator

Your next question comes from Kevin Ellich – RBC Capital Markets.

Kevin Ellich – RBC Capital Markets

Did you say the expectation for DailyMed is supposed to be $40 million for fiscal year 2009?

Marvin Richardson

What we said is that in fiscal 2009 our pharmacy revenues segment will be in the range of $40 million. And so that would include all aspect of our business. Obviously DailyMed is a large chunk of that. But we expect to see somewhere in that neighborhood and I think once we have the opportunity to really evaluate the Medicaid program, specific plan, the EverCare program over the next few weeks, we’ll provide better color on what that is and how that relates to our overall revenue number.

Kevin Ellich – RBC Capital Markets

Do you have any visibility on any other opportunities outside of the Indiana Medicaid and EverCare contract, any other states that you’re talking to at this point?

Marvin Richardson

Certainly what we’re wanting to do is gather as much data as possible from both the EverCare program and the Indiana Medicaid program relative to other healthcare costs. We’ll probably have more information sooner from EverCare than we will from the Indiana Medicaid, just in terms of what might happen to hospitalizations, what might happen to long term care stays and those kinds of things.

Kevin Ellich – RBC Capital Markets

Going back to the 8,000 lives you guys mentioned in Minnesota that EverCare covered, what’s your expectations? Do you expect to penetrate all 8,000 lives or maybe get half that?

Marvin Richardson

No, we don’t typically expect that we’re going to penetrate a large percentage. We’ve been very conservative in our estimates. You know obviously if you looked at for example the Indiana Medicaid program at 70,000 patients, if we were to pickup all 70,000 patients it would be $420 million worth of revenue.

For all the patients in Minnesota it would be $48 million or revenue. So we’ve been very conservative in terms of our overall percentage of what we think we’ll get. Obviously if we get more than that, we’re very happy. But for right now, I think we’re going to settle on a percentage much less than that, I think we’ll have more visibility once we get the programs really engaged.

But to your point, going back to the first question for just a second, it is certainly our intent to once we begin to gather more data is to get a national sales person or persons out there calling on other payers.

Whether those payers are state payers, or whatever those payers are insurance companies or whether those payers are employers, as we begin to get data on what we think will be positive data on our ability to effect hospitalizations and long term care, we’ll get that force out there looking at that. It’s certainly something we want to do.

Kevin Ellich – RBC Capital Markets

Switching back to the home care piece of the business, have you guys ever broken out and maybe I missed this, but have you broken out what the margins look like on that business?

Matthew Middendorf

Specifically for the entire segment, we’ve broken it out. For the year the margins on services were approximately 34.2% for the entire segment.

Kevin Ellich – RBC Capital Markets

Does that include the equipment piece of the business too?

Matthew Middendorf

Yes. The equipment side of the business or the non-healthcare rolls up into that services segment.

Kevin Ellich – RBC Capital Markets

Marvin, in some of your prepared comments and the press release, you indicated that some of the markets where you guys have staffing has been soft. Could you expand on that, any specific geographies you’re talking about?

Marvin Richardson

I think the per diem markets, the per diem staffing markets and this is across the entire industry, you’re seeing that they’re soft, in particular for us that’s Florida, California and the New England state area. That’s where we’ve seen some softness in the per diem staffing area. We’ve seen growth in the travel staffing business as well as the overall home care business. It’s really that per diem staffing that’s sort of down across the country and for us those three areas if you will are the ones that we’ve seen the softness.

Operator

Your next question comes from Sheryl Skolnick – CRT Capital Group.

Sheryl Skolnick – CRT Capital Group

I’m going to go back to the $40 million and the math. So I think what you just said about the conservatism in your view and it’s better to be conservative, I’m not trying to push you to be more aggressive, but I’m just trying to understand. So if I take $40 million and I divided it by $6,000, I come up with roughly 6,700 members or lives that you cover, I think that’s correct.

And that would be sort of a roughly a little less than 50% penetration rate in Minnesota and certainly 50% of your 10% or the 7,000 lives that you once talked about for Indiana. Is that the right way to look at that or should we weight more to Indiana and a little less to EverCare? Or is there another piece of revenue in there that I’m missing?

Marvin Richardson

There’s other aspects of pharmacy revenue in addition to DailyMed. We have JASCORP which is our pharmacy management [inaudible] company and then we have a mail order senior care pharmacy out of Paducah that’s in there. And then we’ve got some nebulizer medication business and what not that’s in there as well.

So the answer is, are we being conservative? Yes. And I think that’s sort of the hallmark of us this past year is I like being conservative. I think you’re right, if you do the math it’s certainly a lot less than 10% penetration for those programs and we’re comfortable there.

Sheryl Skolnick – CRT Capital Group

On Indiana of the 70,000 lives in total in the CareSelect program, these are all homebound Indiana Medicaid patients, correct?

Marvin Richardson

That’s correct, these are patients that the state of Indiana knows will be in nursing homes and hospitals if they don’t better manage their care. So it is a segment that, these people have multiple disease states, they’re on high numbers of medications and if they’re not managed well, they’re going to cost shift for the state into hospitalizations and nursing home visits and then it gets very pricey.

Sheryl Skolnick – CRT Capital Group

I just wanted to make sure that there wasn’t any, that part of the reason why you are being as conservative was that there are patients in there for whom DailyMed might not be appropriate?

Marvin Richardson

There could be some patients that are on a small number of medications in that group that might not be appropriate, but for the most part these are people at home taking medications, no different than other seniors or others like that in that particular segment and need that kind of care.

Sheryl Skolnick – CRT Capital Group

I’m sorry to beat you up but I’m going to anyway, so might the state of Indiana be a little disappointed if your penetration rate isn’t more aggressive in the first year?

Marvin Richardson

I think we’re going to do everything we can to increase the penetration rate and certainly the state of Indiana through their two care plans is going to do everything they can to increase the penetration rate. I just think from our perspective, we’re better off being very conservative with where we are.

You know but I think certainly what you see with this is we’ve seen in other areas is once people begin to early adopt the program and case managers begin to get comfortable with DailyMed and what it’s doing for their patient segment, they get interested. And then you’ll see a higher adoption rate as you go along because they have more experience with it.

Operator

Your last question comes from Kevin Ellich – RBC Capital Markets.

Kevin Ellich – RBC Capital Markets

Have you guys moved into offering DailyMed to patients that are within a facility or receiving care in the institutional setting rather than just at home?

Marvin Richardson

We do in the assisted living area. In the assisted living market, there are very little regulations around medication administration. Most of the time, assisted living facilities cannot administer medication, they can only remind patients to take it.

So in that particular segment, it really helps an assisted living facility to have a medication system like DailyMed to do that. In the long term care area market where you have other big players like Omnicare and PharMerica, it is a more highly regulated system with medication [cards unity used] packaging, nurses have to administer medication.

And DailyMed at that level is probably not as appropriate as it is in sort of that senior care group home assisted living market. And we do have some of that, we have business up in Minnesota, we have business in Kentucky around that particular area.

Kevin Ellich – RBC Capital Markets

Do you see that as a strategic opportunity to expand and further penetrate the independent and assisted living facilities?

Marvin Richardson

Yes we do. Our focus we think is large payer segments like the Indiana Medicaid and United Healthcare programs, one. Second obviously is cross selling our DailyMed product into our existing homecare patients which we’re doing in four states today, Illinois, Indiana, Michigan, North Carolina and then we’ll begin to expand that over time.

That’s the second area. The third is a direct to consumer launch in Indiana and we also do that in Minnesota where we’ve launched direct to consumer the product. We’ve done that in Terra Haute and we’ll start doing that in other areas of Indiana. And then certainly fourth is other group home assisted living types of segments where we have a sales force that goes out and calls on those types of facilities.

Operator

There are no further questions.

Marvin Richardson

Thank you all very much for your interest and thanks for the participation of everybody that was on the call and we’ll look forward to updating this group on our first quarter in early August. Thanks.

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