SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-24807
CORECARE SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 23-2840367
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
111 N. 49th Street
Philadelphia, PA 19139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
215/471-2600
(ISSUER'S TELEPHONE NUMBER)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.001 per share
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 reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [x]
No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $19,948,895.
The aggregate market value of the common equity held by non-affiliates based on
the closing sale price of Common stock as of April 13, 1999, was $4,454,366.
The number of shares outstanding of each class of the issuer's common equity, as
of April 1, 1999, was as follows: Common Stock - 15,949,128 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [x]
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CORECARE SYSTEMS, INC.
FORM 10-KSB
TABLE OF CONTENTS
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PART I
<S> <C> <C>
ITEM 1- BUSINESS 2
ITEM 2- DESCRIPTION OF PROPERTY 18
ITEM 3- LEGAL PROCEEDINGS 18
ITEM 4- SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS 19
PART II
ITEM 5- MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 20
ITEM 6- MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 21
ITEM 7- FINANCIAL STATEMENTS 35
ITEM 8- CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE35
PART III
ITEM 9- DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION
16 (A) OF THE EXCHANGE ACT 36
ITEM 10- EXECUTIVE COMPENSATION 42
ITEM 11- SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT44
ITEM 12- CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
ITEM 13- EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS
ON FORM 8-K53
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PART I
------
ITEM 1 - BUSINESS
(A) BUSINESS DEVELOPMENT:
----------------------
CoreCare Systems, Inc. (the "Company") is a regional health care network
providing behavioral services and clinical drug research, operating in Eastern
Pennsylvania. The Company's headquarters are located at 111 N. 49th Street,
Philadelphia, PA 19139. Its telephone number at that location is (215)
471-2600. In 1996, the Company transferred its state of incorporation from
Nevada to Delaware.
In 1998 the Company initiated the second phase of its strategic plan by
integrating clinical trial research services to the pharmaceutical biotech
industries into its behavioral services operating platform. The Company
commenced conducting clinical trials in the area of new drugs to treat diseases
of the Central Nervous Systems and for drugs designed to treat diseases
afflicting the geriatric population. The Company intends to recruit volunteers
for clinical trials from the behavioral health services patient population. The
Company put in place an experienced team in clinical trials and shortly
thereafter signed the first of several contracts.
In April 1998, the Company expanded its billing business by acquiring the
assets of Preferred Medical Services, Inc., a Pennsylvania based physician
billing and practice management business, valued by the Company at $340,290, for
a purchase price of $260,000 (less outstanding billed accounts receivable as of
the closing date), paid $28,545 in cash and the balance of $111,744 by way of a
promissory note and 250,000 shares of the Company's Common Stock, valued at $.80
per share.
In July, 1998 the Company expanded its behavioral care platform by opening
a drug and alcohol rehabilitation unit at the Kirkbride Center. The unit was
licensed for 43 beds as of December 31, 1998 and subsequently increased to 63
beds.
The Company conducts all of its operations through its subsidiary
corporations. Unless the context indicates otherwise, the term "Company" when
used herein shall include the Company's subsidiaries.
(B) BUSINESS OF ISSUER:
---------------------
The Company has three primary lines of business. They are as follows:
(I) Behavioral Health Services
(II) Clinical Trials and Outcomes Research
(III) Billing and Practice Management
Additionally the Company has secondary business interests, which include the
following:
(IV) Leasing office space at the Kirkbride Center to third parties
(V) Health and Fitness Center
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The Company operates its business through eight (8) wholly owned
subsidiaries including the following:
- - CoreCare Behavioral Health Management, Inc. d/b/a/ Kirkbride Center and
d/b/a Westmeade Center at Kirkbride
- - Westmeade Healthcare, Inc. d/b/a Westmeade Center at Warwick
- - Chestnut Hill Health & Fitness Center, Inc.
- - Managed CareWare, Inc., d/b/a CoreCare Management, Inc. and Preferred
Medical Services
- - CoreCare Realty Corp.
- - CoreCare, Inc. (Inactive)
- - Lakewood Retreat, Inc. (Inactive)
- - Quantum Managed Mental Health Systems, Inc., d/b/a Quantum Clinical
Services Group
(I) Behavioral Health Services
The Company has undertaken an aggressive development campaign to create a
behavioral health care system which will provide continuity of care to patients
and serve as a platform to expand its clinical trial research services to the
pharmaceutical industry. The Company has responded to the cost-effectiveness
demands of Managed Care by:
- Creating a critical mass of services in a defined geographic area;
- Providing a spectrum of high quality acute, step-down, and outpatient
services;
- Structuring services with clinical continuity such that clinicians
follow patients through service levels;
- Shifting the focus of clinical control from the individual clinician
to the system case manager following approved clinical protocols;
- Computerization of all administrative, financial, and clinical
functions; and
- Structuring to deliver services pursuant to capitated contracts, i.e.
contracts shifting the risk for treatment costs of a defined
population from the insurer or other third-party payor to the
provider.
The healthcare industry today is increasingly affected by Managed Care
companies, i.e., companies that contract with the healthcare providers to
provide services and products to the Managed Care companies' subscribers.
Generally, Managed Care companies seek to contract products and services at a
cost below the provider's customary fee schedule in exchange for the access to
the larger patient-base which these organizations control. Two major segments
of Managed Care include health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs"). HMOs and PPOs customarily pay each provider
on a fee-for-service basis, usually at a lower rate than the provider would
otherwise charge. The rates are negotiated per each individual contract. With
increasing frequency, HMOs may contract with providers on a "capitated" or "case
rate" basis. Capitation means that the provider is paid a periodic fee based on
the number of subscribers eligible to use that provider's services, without
regard initially to the level of use. Case rate means that each provider is
paid a set amount for each inpatient episode. The Company currently has no case
rate contracts, and no capitated contracts.
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Management believes that Managed Care has been a catalyst for the
consolidation of individual and small group health care providers into corporate
delivery systems. Managed Care companies prefer to contract with multi-service
system providers who, with one call, can provide a variety of services to
multiple patients. In addition, integration of services helps assure better
clinical continuity of services and greater cost efficiency. The Company
believes it is positioned to benefit from this trend in defined geographical and
service areas.
The key to clinical success in a managed care environment is the ability of
a healthcare provider to establish a good clinical outcome in a time-limited
episode of care. To effect this, the Company is committed to a biopsychiatric
approach to treatment relying on the appropriate use of psychopharmacology.
State of the art Behavioral treatment changes with each new drug discovery,
therefore, the Company is committed to conducting clinical research drug trials
on central nervous system drugs at CoreCare Network sites, as well as other
unrelated healthcare services sites.
(I)(B)(1) BEHAVIORAL HEALTH PRINCIPAL PRODUCTS AND SERVICES:
At the present time, the services provided by and the business activities
of the Company are within the following categories: (A) Acute Inpatient
Hospitalization; (B) Acute Residential Psychiatric Care; (C) Partial
Hospitalization Services; (D) Outpatient Care; (E) Drug and Alcohol
Rehabilitation Services; (F) Wrap-around Services; (G) Billing and Practice
Management; (H) Real estate development and leasing activities; (I) Health and
Fitness Center, and (J) Pharmaceutical Clinical Research Trials.
(A) ACUTE INPATIENT HOSPITALIZATION
CORECARE BEHAVIORAL HEALTH MANAGEMENT, INC. ("CBHM") d/b/a the Kirkbride
Center and d/b/a Westmeade Center at Kirkbride is the largest subsidiary of the
Company. CBHM, formerly known as the CareGroup of America, Inc., was acquired
by the Company on March 24, 1995, at which time, it was a management services
organization.
On February 26, 1997, CBHM acquired the assets and selected licenses of the
INSTITUTE OF PENNSYLVANIA HOSPITAL for $4.5 million. The KIRKBRIDE CENTER
consists of seven (7) buildings totaling 422,800 square feet on a 27-acre site
comprising an entire city block bounded by Market Street, Haverford Avenue, and
48th and 49th Streets in Philadelphia, Pennsylvania. Kirkbride provides acute
inpatient psychiatric care in a freestanding hospital setting supported by a
full continuum of step-down services.
The 120 bed licensed acute psychiatric hospital transitioned operations without
closure on February 26, 1997, starting with an average daily census of 15
patients and increasing to 114 in December 1998. Since that date of
acquisition, operating a dedicated geriatric unit, a dual diagnosis substance
abuse unit, and a general adult psychiatry unit has further enhanced volume
growth. Of the 120 licensed beds, 57 beds hold dual licensure to treat
psychiatric clients with substance abuse problems. Additionally in July 1998 the
Kirkbride Center added licensed drug and alcohol rehabilitation beds starting
with 20 beds and increasing to 63 in early 1999. In 1997, the 24-bed
residential treatment license of the Westmeade Center at Wyndmoor was relocated
to the Kirkbride Center. The following describes the clinical programs and
acute inpatient services available at Kirkbride:
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GERIATRIC PROGRAM
------------------
The Geriatric Program provides specialized psychiatric acute-care to older
adults, who are demonstrating emotional symptoms and behaviors indicative of
acute distress. Geropsychiatrists and behavioral specialists lead the treatment
team, supported by a therapeutic milieu and structured living situation.
Discharge specialists work with the family, exploring long-term placement needs
following the acute care episode.
GENERAL ADULT PROGRAM
-----------------------
In the Acute Adult Program, the treatment team works intensively with each
patient to achieve stability, strengthen and support the family and return the
patient to the home or to a less intensive setting, as quickly as possible.
Individuals, 18 years or older, participate in intense individual, group and
family therapy, psychoeducational programs and a rich and varied program of
therapeutic rehabilitation activities.
SUBACUTE ADULT TRANSITION PROGRAM
------------------------------------
The Subacute Adult Program provides intensive psychiatric treatment to
individuals who no longer meet acute inpatient criteria, yet still require a
24-hour structured treatment setting to provide safety and stabilization. The
Transition program serves as a diversion from more costly acute inpatient care,
and as a step-down unit to transition patients from acute care to discharge. The
average length of stay in this program is five (5) days.
THE SUBSTANCE ABUSE DUAL DIAGNOSIS PROGRAM
-----------------------------------------------
Of the 120 licensed beds at Kirkbride, 57 beds hold dual licensure from
both the Pennsylvania Department of Public Welfare and the Pennsylvania
Department of Health to treat psychiatric clients with substance abuse
disorders. The program services adults over the age of 18 offering group,
individual, family or multi-family group therapy, psycho-educational services as
well as medical detoxification and methadone treatment. Treatment typically also
includes involvement in self-help groups, such as Alcoholics Anonymous or
Narcotics Anonymous.
THE KIRKBRIDE CENTER'S MARKET: The Kirkbride Center's primary market is
West and North Philadelphia. While certified to provide Medicare, Medicaid and
Blue Cross recipients, the facility's primary payor is Community Behavioral
Health (CBH).
Effective February 1, 1997, each county in Pennsylvania assumed
responsibility for managing its own medical assistance population. Philadelphia
County, which has a Medicaid population of approximately 450,000 participants,
has assigned the behavioral healthcare management of these individuals to
COMMUNITY BEHAVIORAL HEALTH, a non-profit community-based managed care
organization. Kirkbride Center is located in the heart of Philadelphia's
Medicaid population, which is now controlled by Community Behavioral Health.
The Company anticipates that CBH and Medicare will continue to represent the
predominant payors of services at the Kirkbride Center.
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Notwithstanding the number of contracts which the Kirkbride Center has,
these contracts permit the Kirkbride Center to seek payment for treatment of the
patients who are subscribers or insureds of the payor companies, but do not
ensure that the potential patients covered by these payors who seek behavioral
health care will become patients of the Kirkbride Center.
(B) ACUTE RESIDENTIAL PSYCHIATRIC CARE
The Company, through an acute residential treatment center, Westmeade
Center at Warwick (the "Westmeade Center,") is engaged in the business of
providing non-hospital acute residential psychiatric services to adolescent
patients. The Westmeade Center at Wyndmoor, a 24-bed acute residential treatment
center serving adult patients located in Montgomery County, Pennsylvania was
closed in December 1996. Its license has been transferred to the Kirkbride
Center for improved operational efficiency. A third residential treatment
center, Lakewood Retreat, located in the Pocono Mountain region of northeastern
Pennsylvania, was closed in April 1996.
Through the Westmeade Center, the Company provides services that are less
costly than in a traditional hospital setting. The residential psychiatric
treatment program is intended for patients who volunteer to be admitted for
treatment, who do not need extensive long-term care, and who do not need any
form of restraint.
Following the acquisition of the Westmeade facilities, the Company
determined that it would be more efficient to concentrate its residential
treatment efforts at the Westmeade Centers, and to sell Lakewood Retreat. In
part, the decision was motivated by Managed Care companies' desire to use
providers that are geographically convenient and easily accessible to their
patients, and Lakewood Retreat's distance from the Company's concentrations of
service in Southeastern Pennsylvania.
THE WESTMEADE PROGRAM: The Westmeade Center at Warwick was established to
provide residential psychotherapeutic services to adolescents, ages 12 to 18,
who are ambulatory and medically stable. The program, which operates 24 hours
each day, offers intensive clinical treatment in a less restrictive residential
setting. The length of stay is short-term and the focus of treatment addresses
the key issues that precipitated the patient's admission. The goal is to
eliminate or reduce the barriers that prevent the patient from functioning
successfully as an outpatient.
The Westmeade Center provides an acute care alternative to inpatient
psychiatric treatment. The Westmeade Center is also utilized as a step-down
unit for those persons who still require 24-hour supervision but have benefited
from hospitalization to the degree that a less restrictive setting can now meet
their therapeutic needs. The Westmeade Center does not attempt to treat people
who are so severely ill that they require seclusion and/or restraint that are
only available in a hospital setting.
Each patient is assessed to determine unique strengths and weaknesses so
that a multi-disciplinary treatment team can develop an individualized treatment
plan. The goal of this process is to identify the specific interventions
designed to assist and encourage the patient's understanding of his or her
potential for emotional and psychological well being to build a successful
outpatient. This process identifies the philosophical basis of the program; the
treatment plan establishes a guideline for the direction of care the
multi-disciplinary professional staff will provide and is related to the unique
identified clinical problems of each patient. As part of the treatment planning
process, objectives are established which address the methodology, staff
responsibility and time frames necessary to facilitate treatment.
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The Westmeade patients suffer from a variety of psychiatric disorders such
as depression, manic depression and anxiety disorder. The Westmeade Center's
core psychiatric programs are designed to accomplish stabilization of symptoms
by addressing management of major life stresses. Therapy experiences focus on
cognitive and behavioral restructuring of dysfunctional thinking and belief
systems by addressing cognitive and perceptual misperceptions, dysfunctional
coping mechanisms, and inadequate life skills. Concentrated, diagnosis-driven
individual and group therapy is given to patients in homogeneous groups
(gender-specific where needed).
THE WESTMEADE CENTER'S MARKET: The primary market of the Westmeade Center
at Warwick is Eastern Pennsylvania with significant concentration of cases from
Bucks, Montgomery and Philadelphia counties. The Westmeade Center at Warwick is
a certified Medical Assistance provider and has numerous contracts with Managed
Care Providers, health insurance companies, however, the most significant payors
are Community Behavioral Health, Americhoice and Medicaid.
The Westmeade Center at Wyndmoor's primary market has shifted in the last
two years to reflect the changes in the managed care industry. Major payors
have shifted from US Healthcare to the managed Medicaid payors of Merit
Behavioral Healthcare and Mustard Seed which were then supplanted by Community
Behavioral Health. Because Philadelphia residents increasingly represented
Wyndmoor's patient base, the operating license was relocated to the Kirkbride
Center, thus making West Philadelphia the major market.
Notwithstanding the number of contracts which the Westmeade Center has,
there is no assurance that these companies will continue to provide coverage for
the psychiatric care offered by the Westmeade Centers, even with these contracts
in force. In addition, these contracts permit the Westmeade Centers to seek
payment for treatment of the patients who are subscribers or insureds of the
payor companies, but do not ensure that the potential patients covered by these
payors who seek behavioral health care will become patients of the Westmeade
Center.
(C) PARTIAL HOSPITALIZATION SERVICES
The Kirkbride Center is the Company's only licensed provider site to
provide hospital based psychiatric partial hospitalization services. The
license provides for 50 slots of treatment for the provision of care to adults
and seniors at the Kirkbride Center. Such programs provide up to 8 hours of
care a day and allow the clients to reside at home while receiving treatment.
Clinical intensity may vary allowing the program to serve as an alternative to
acute inpatient hospitalization as well as a step-down program for acute
programs.
GERIATRIC PARTIAL HOSPITALIZATION PROGRAM
--------------------------------------------
The Geriatric Partial Hospitalization Program provides day-treatment to
senior individuals demonstrating psychiatric illness. Services are provided
Monday through Friday, and include diagnostic and mental health treatment
services within a protected and structured environment. Individual and group
therapy, activity therapy and medication monitoring are provided. Family
support is also provided. Day-treatment allows the individual to continue
living at home, or in an assisted living or nursing care facility.
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ADULT PARTIAL HOSPITALIZATION PROGRAM
----------------------------------------
The Adult Partial Hospitalization Program provides interdisciplinary mental
health care, as an alternative to inpatient treatment or as a transition for
those who need ongoing treatment and support after an inpatient stay. The
program, which provides services Monday through Friday, offers group,
individual, family and multi-family group therapy, psycho-educational services,
multi-media educational and activity programs, access to anonymous-based
self-help groups or community-based support groups as appropriate and adjunctive
services such as family counseling and occupational therapy programs as
indicated.
PARTIAL HOSPITALIZATION MARKET: The Partial Hospitalization Programs at
--------------------------------
Kirkbride serve primarily West and North Philadelphia. The major payors of
service are Community Behavioral Health and Medicare. The Company has also
applied for licensure for several satellite locations but there can be no
assurance that these license to operate will be obtained.
(D) OUTPATIENT AND INTENSIVE OUTPATIENT PROGRAMS
The Company has developed a comprehensive network of professional providers
to meet the outpatient needs of its clients. These professional providers
include psychiatrists, psychologists, and licensed social workers, certified
addiction counselors and psychiatric nurses.
As they are credentialed by various managed care companies and third party
payors, these health care professionals and clinicians are able to provide
services to children, adolescents, adults and seniors. Approaches offered
include individual, group, couples and family therapy depending on clinical
need. Pharmacotherapy is also provided.
Urgent appointments are provided within five (5) hours; emergency
appointments are provided within forty-eight hours; and routine appointments are
scheduled within five (5) business days. Day, evening and weekend appointments
are available at affordable fees. Because the Company maintains contacts with
many of the managed care companies, the cost of therapy to the client is often
only the co-payment.
Outpatient services are provided at KIRKBRIDE CENTER (West Philadelphia,
Pa), and the WESTMEADE CENTER (Warwick, Pa). Until March 1998, the Company also
provided outpatient services through American Institute of Behavioral
Counseling, Inc. at Greenbrook, New Jersey, and in Easton, Pennsylvania until
December 1998. Given limited activity and no strategic focus in New Jersey, the
Company sold the operations of this facility.
OUTPATIENT MARKET: All sites serve primarily Managed Care referral
------------------
patients. Kirkbride Center serves Medicare, Medicaid and Community Behavioral
Health claimants as well.
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(E) DRUG AND ALCOHOL REHABILITATION SERVICES
In the last year, the Kirkbride Center has had to increase the size of its
acute substance abuse dual diagnosis program from 25 to 57 beds. Given this
demand, Kirkbride has received an additional license permitting the Center to
treat up to 63 drug and alcohol rehabilitation clients on a subacute level in
addition to the Center's acute program. The Program has established payor
contracts with Medical Assistance and Behavioral Health Specialists Initiative
and Community Behavioral Health.
REHABILITATION PROGRAM MARKET: Kirkbride Center primarily serves West
and North Philadelphia. Primary payors are expected to be Community Behavioral
Health, Medicaid and special programmatic funding contracts from the justice
systems.
(F) WRAP-AROUND SERVICES
In February 1997, upon completion of the acquisition of the Institute of
Pennsylvania, the Kirkbride Center received a Provider 50 license to provide
wrap-around-psychiatric services to adolescents. Provider 50 services are
designed to provide support services in the home and/or school setting to avoid
inpatient hospitalization. While Kirkbride Center holds this license, the
program has not yet become operational, but remains part of the Company's
strategic plan. The Company has negotiated payor contracts with Americhoice,
Merit and Community Behavioral Health for this service and intends to begin
operations in 1999.
(G) BILLING AND PRACTICE MANAGEMENT
The Company's acquisition of ZA Consulting/Management, Inc. ("CMI,") a
provider practice management, billing and collection company for diverse medical
specialties, enhanced and accelerated its efforts to computerize its operations.
CMI also has entered into contracts with CoreCare Behavioral Health Management,
Inc. and all other Company's subsidiaries to act as the billing and collection
agent for all Company services. CMI has also assumed all network management and
corporate office functions since July 1997. In April 1998, CMI doubled its
non-CoreCare related revenues through the acquisition of certain assets and
scheduled liabilities of Preferred Medical Services. CMI consolidated
operational activities, which include the reduction of administrative staff and
closure of the Preferred Medical Services office in Blue Bell, Pennsylvania in
December 1998. CMI is located in Wayne, Pennsylvania.
The Company operates its Billing and Practice Management business through
its one wholly owned subsidiary, Managed CareWare, Inc. (D/B/A) CoreCare
Management, Inc. and Preferred Medical Services.
Services provided by the Company include:
a) Billing services for physician practices, especially hospital
based specialties of radiation oncology and anesthesiology.
b) Billing services for Behavioral facilities including hospital
and non-hospital
c) Practice management services including bookkeeping, accounting,
and credentialling for physician groups.
d) Information Services support for billing including direct
electronic claims transmission between Medicare and Payers.
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PRACTICE MANAGEMENT MARKET: CMI serves clients primarily in Eastern
Pennsylvania, New Jersey and New York. Services are rendered under services
agreements on a fee for services basis. Core competencies include behavioral
health care, radiation oncology, and anesthesiology, and most Medical
subspecialties.
(H) REAL ESTATE DEVELOPMENT AND LEASING ACTIVITIES
KIRKBRIDE REAL ESTATE LEASING ACTIVITIES
--------------------------------------------
Since the Kirkbride Center acquisition in 1997, the Company has been
developing and marketing unused space creating a medical community of
complementary healthcare providers and further enhancing the value of the
property. In addition to the developed land there exists significant unimproved
property suitable for sale or lease.
To provide for an orderly development program, CRCS created a new
subsidiary, CoreCare Realty Corporation to assume responsibility for development
of the Kirkbride Center. To expand CRCS' resources, Franklin Development
Company, LLC ("FDC") based in Boston, Massachusetts was hired as a management
consultant. Christopher Fleming, a senior manager in FDC, is the son of Thomas
T. Fleming, Chairman of CoreCare Systems, Inc.
To effect the development plan and to simplify Kirkbride Center's financial
records and Medicare cost reporting, CoreCare Realty Corporation has signed a
master lease with Kirkbride Center covering all space not reserved for
Kirkbride's direct patient care services.
Schedule of Leases at Kirkbride Center
<TABLE>
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Tenant Space Leased (SF) Lease Expiration Date
- ----------------------------------- ----------------- ---------------------
<S> <C> <C>
Physician Offices 24,000 02/01/2001
Children's Hospital 65,400 10/31/2007
Southeast Mental Health Association 18,000 07/01/2009
Pennsylvania Hospital 18,683 06/30/1999
Northeastern Linen Services 15,000 08/21/2007
Rudolphy Residence for the Blind 5,000 09/30/1999
Vacant 44,000
Total 190,083
</TABLE>
The Company has other subsidiaries:
- Chestnut Hill Health and Fitness Center, Inc.
- CoreCare, Inc.
- Lakewood Retreat, Inc.
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LAKEWOOD RETREAT, INC.
The Company owns a 57-acre facility in East Stroudsburg, PA previously used
as a residential treatment facility. Operations were terminated in December 1996
due to adverse market changes resulting from managed care. The Company is
attempting to sell the facility. Its value was written down in 1998 to
$1,100,000 which represents the Companies estimate for its net realizable value.
(I) HEALTH AND FITNESS CENTER
The Company, through its wholly owned subsidiary, Chestnut Hill Health and
Fitness Center, Inc. ("CHHFC") operate a health and fitness center. CHHFC
provides a complex of related health and medical services, including a
comprehensive aerobic program with the latest cardiac conditioning techniques,
as well as yoga for stress management, resistance and weight training equipment,
and exercise physiologists. CHHFC leases approximately 7,000 square feet in the
Whitemarsh Professional Center in Erdenheim, Pennsylvania, which facility has a
sauna, whirlpool, full locker room and child care.
The Company currently plans to relocate CHHFC to a better quality building
in an effort to eliminate certain growth obstacles. Given the relocation of the
Westmeade license to the Kirkbride Center, the Company is reevaluating the
fitness center's growth plan and place in the Company's overall strategic
business plan.
CHHFC'S MARKET: CHHFC serves a local higher income community, the Chestnut
Hill area of Philadelphia, Pennsylvania. Its service area is approximately 20
minutes driving radius from the health and fitness center.
(K) CLINICAL RESEARCH TRIAL SERVICES
The Company, through its wholly owned subsidiary, Quantum Managed Mental
Health Systems, Inc., d/b/a Quantum Clinical Services Group, has recently begun
to penetrate the clinical research market. During 1998, the Company utilized
Quantum to provide investigative services for the pharmaceutical and contract
research organizations in the area of psychiatric and neurological clinical
trials, and to conduct outcomes research studies for clients using medical
records of physician practices and experience of related facilities.
Drugs to treat psychiatric and neurological diseases are estimated to account
for 25% to 30% of all drugs under development by pharmaceutical and biotech
firms. Clinical Trials for Central Nervous System (CNS) drugs are estimated to
have been $1.8 billion in 1998. Wall Street Analysts estimate the demand for
clinical tests to be increasing at a rate of 15% - 20% per year. At this time
there exists a critical need for CNS investigators due to the large number of
drugs in the development pipeline and requirements for extensive testing by the
FDA. Industry completion rates on trials are low due to patient recruitment and
project management difficulties.
Quantum has been staffed with a experienced and accomplished team to
perform clinical trials of psychopharmacological agents and products. These
trials are to be conducted at the Kirkbride Center using approximately 6,000
square feet of space for outpatient research studies and a 20-bed unit for
studies requiring intensive observation. Quantum is also to serve as a platform
for coordinating multi-center clinical trials at sites other than the Kirkbride
Center, including affiliated units of the Company, physician practice management
groups and other behavioral health systems.
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Four contracts with clinical research companies have been signed by Quantum
and are in progress, including contracts with Clinical Studies, Ltd. of
Providence, RI that is under contract with Janssen Research Foundation of
Belgium and a contract with Covance Clinical and Periapproval Services Inc, of
Princeton, NJ that is under contract with Abbott Laboratories.
The Company operates its clinical research business through its wholly
owned subsidiary, Quantum Managed Mental Health Systems, Inc. (d/b/a Quantum
Clinical Services Group). Quantum contracts with its related subsidiaries or
other non-related third party companies to conducts clinical trials.
The company intends to provide services on products to treat diseases of
the Central Nervous System and Geriatric population. The intends to provide
services in the four phases of drug trials in human volunteers; which commence
after the drugs have been approved for testing in humans by the FDA.
Phase I: testing for tolerance in healthy volunteers
Phase II: testing for effectiveness in a small sample of afflicted
patients.
Phase III: placebo controlled testing in a large sample of afflicted
patients necessary for FDA approval
Phase IV: Long term monitoring tests of drugs post FDA approval.
Currently Quantum is providing services in Phase II and III trials of new
drugs. The company is evaluating the development of a Phase I unit at its
Kirkbride Center.
QUANTUM'S MARKET: United States as well as internationally based
pharmaceutical companies are seeking appropriate clinical trial sites for the
testing of their drugs.
(B)(2) DISTRIBUTION METHODS:
I. Behavioral Services
The Company obtains patients primarily through referrals from physicians,
hospitals, community based health care organizations, and Managed Care plans and
other third party payors. Therefore, the focus of the Company's sales and
marketing programs is direct sales to physicians, hospitals, other health care
institutions and third party payors. The Company's marketing focus is
necessarily local, concentrating on establishing relationships with the local
referral sources. In the markets that it currently serves, the Company believes
that it has a strong reputation for quality with physicians and other referral
sources.
Both payors and referral sources increasingly demonstrate a preference for
providers, which offer systems of care at various levels. Integration of
services helps assure better clinical continuity of services and greater cost
efficiency. In addition, Managed Care companies and other payors are
continually trying to reduce the number of vendors with whom they must contract.
The Company believes, therefore, that achieving a critical density of services
in a defined geographical area, establishing and maintaining personal
relationships with referral sources, a continued focus on quality, and
increasing economies of scale all are important keys to its ability to compete
effectively with smaller local competitors which may not offer a full range of
services, as well as larger national providers which may not provide a full
spectrum of integrated clinical services in the Company's market area.
13
<PAGE>
The Company markets its services to all types of payors, including
insurance companies and Managed Care companies, but primarily to Managed Care
companies on a negotiated fee basis. In markets where the Company can offer a
comprehensive range of services, it intends to market its services on a selected
"capitated basis" (fixed fee per covered life per month), or "case rate basis"
(fixed fee per inpatient episode). To date, the Company has not entered into
any capitated contracts.
Referral sources include case managers, crisis workers, hospital emergency
rooms, evaluation centers, private practitioners, clinics, etc. that have direct
patient contact and a need or obligation to place the patient in a treatment
setting. A referral source usually has a range of options of the best placement
for a patient and weighs several factors including proximity to the patient,
cost, appropriateness of service and responsiveness of provider. This
behavioral patient platform serves as a magnet to attract central nervous system
clinical drug trials for Quantum as well.
II. Clinical Research Services
- ---------------------------------
The Company has obtained contracts for clinical research through Contract
Research Organizations (CRO's) and Site Management Organizations (SMO's) which
are retained by Pharmaceutical and Bio-Tech Companies. The Companies markets its
services Pharmaceutical Companies, CRO's and SMO's. The Company's marketing is
focused on established relationship between key staff and pharmaceutical firms
and their representatives. Should the Company be successful in establishing a
Phase I unit inpatient clinical research unit will serve as a feeder for Phase
II, III, and IV studies and should result in an increase research activities.
III. Billings and Practice Management
- -----------------------------------------
The Company's growth has been derived by acquisition historically. Growth
through new provider contracts has been limited given the demand created by
Kirkbride's growth. The Company has recently developed a marketing plan based
upon three pronged strategy:
1. Referrals made from financial and reimbursement consulting or
lending groups to physicians and small provider groups.
2. Referrals made from existing clients
3. New business development from traditional marketing
Historically the Company has had a successful cooperative marketing
relationship with reimbursement consultants and intends to expand its network of
such groups.
(B)(3) PRODUCT OR SERVICE DEVELOPMENT:
(B) (3) (A) BEHAVIORAL SERVICES:
------------------------------------
The Company's marketing strategy is to develop in selected geographic
markets, extensive, wholly-owned, multi-level health care delivery systems which
provide a high quality of care in a cost effective manner. The Company intends
to pursue growth by surrounding inpatient sites with outpatient mental health
clinics and other alternative or step-down services. The Company believes that
by providing a fully integrated coverage of the market, it will be able to
generate a critical mass of clinicians, patients and services to generate
significant cost advantages that are more attractive to payors. The Company
believes that this critical mass strategy will allow the Company to leverage
management resources, contracting opportunities with Managed Care payors, sales
and marketing programs, information systems and corporate overhead, as well as
providing a patient base for the growth of clinical drug research contracts.
14
<PAGE>
The Company's approach to the delivery of health services is intended to
yield the following benefits:
The Low Cost Provider. By establishing an extensive, fully integrated
network of multi-disciplinary health care professionals in a given market,
the Company will seek to achieve economies of scale, thereby lowering the
cost of care without compromising quality. For instance, the Company
believes that by employing a full range of clinicians it is better able to
match the appropriate clinician and type of treatment to the patients'
needs.
Managed-Care Friendly. The Company believes that establishing a significant
presence in each of its markets will enable it to meet payor needs more
effectively, and that as the Company increases its ability to provide a
full range of health services, a standardized level of care and the ability
to service all of the payors' patients within a geographic region, it will
increase market share. Additionally, the Company will offer payors systems
for risk management (including contracts under which the Company assumes
various levels of risk), claims reimbursement and clinical outcomes
measures, thereby reducing the payors' administrative burden as well as the
number of provider contracts.
Integrated Clinical Research. The Company is committed to evolving as a
state of the art behavioral healthcare provider as well as a site
management organization for conducting clinical research. We believe these
two product platforms will synergistically support mutual growth providing
an economic advantage to each product.
Attractive to Sellers. The Company believes that through successful
implementation of its business plan and marketing strategy, it will
represent an increasingly attractive potential buyer to single and
multi-site health care providers who face significant uncertainty regarding
the future and who may not possess the financial resources or
administrative skills to adapt to health care reforms, including changes in
reimbursement. The Company will be able to offer potential sellers
management expertise, administrative and regulatory support and increased
job security. In addition, the Company will offer sellers the ability to
realize the value of their businesses as well as the opportunity to benefit
economically from the growth of a larger enterprise.
15
<PAGE>
(B) (3) (B) CLINICAL RESEARCH:
----------------------------------
The Company's focus is to integrate Clinical Research Services into all of
its behavioral services and sites to establish a track record as a reliable,
productive investigative site that performs according to protocols. The Company
believes that the demographic composition of its behavioral customers will make
it an attractive site for conducting clinical research on new drugs. The
Company plans to leverage its relationships through its affiliations, referral
sources, and its Quantum Network of providers to evolve in to a Site Management
Organization specializing in Central Nervous System and Geriatric drug trials.
(B) (3) (C) BILLING AND PRACTICE MANAGEMENT:
--------------------------------------------------
The Company's development strategy is to expand the range of services it
can offer current and future clients. Given the failure of acquisition model of
Physician Practice Management by Hospitals and Public Companies. These groups
are divesting physician practice groups thereby creating demand for billing and
collection services by the independent physicians.
The Company will aggressively market to such prospective clients as well as
expand the scope of its services to include human resources, credentialling,
information services, and payor contract compliance management services.
(B)(4) COMPETITION:
I. Behavioral Services
- ------------------------
There is intense competition among providers in the Company's existing
markets. While most of the markets in which the Company provides services are
highly fragmented, the behavioral health care industry in general is undergoing
consolidation, and the Company will face intense competition in seeking to
increase its market share. Many of the Company's current and potential
competitors have significantly greater financial and other resources than will
be available to the Company. In addition, the national competitors benefit from
contracting with Managed Care companies which themselves operate in more than
one region, volume purchasing and, in some cases, name recognition.
The Company's management believes that the pace of consolidation in the
behavioral health care industry dictates an aggressive multi-prong growth plan
which includes the development of start-up services as well as, acquisition,
alliance or joint venture strategy to enter new markets and to increase market
share.
II. Clinical Research Services
- ---------------------------------
Clinical Research Services for drug trials is a rapidly growing industry.
Drugs for Central Nervous System Diseases are estimated to account for 30% of
all drugs under development. Estimates are that 8-10% of all investigators is
focused on this type of research. The growth in demand has outpaced the
availability of sites and investigators. The Company believes that demand will
support many more competitors and that success will be a function of recruitment
of volunteers and quality of performance.
III. Billing and Practice Management
- ----------------------------------------
The industry is highly fragmented. The Company believes that 75% of the
industry is served by small companies. Many of the Company's current and
potential competitors have significantly greater financial resources than the
Company's.
The Company believes that its capability to service both physician and
hospital based billing as well as provide practice management services will be a
competitive advantage in the market place. Clients prefer to contract with
vendors that can provide multiple services rather than working with multiple
vendors that offer limited services.
16
<PAGE>
(B)(5) RAW MATERIALS: Not Applicable.
(B)(6) CUSTOMERS:
The largest payor for both Kirkbride and Westmeade at Warwick is Community
Behavioral Health, which contributes approximately 63% of all patients for these
sites. Medicare reimbursed Kirkbride for approximately 20% of all inpatients
treated at the facility.
For the year ended December 31, 1998, inpatient payer mix for the Company
was broken down as follows:
<TABLE>
<CAPTION>
WESTMEADE KIRKBRIDE
- --------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Private payment sources (including private insurance companies) 6% 1 %
Medicare/Preferred Provider arrangements 0% 20%
Medicaid 26% 4%
CBH, ABH and Managed Care 68% 75%
Outpatient revenues were broken down as follows:
- ---------------------------------------------------------------
- - Private payment sources 3%
- - Medicare/Managed Care /Preferred Provider arrangements 97%
</TABLE>
Private payment is the category for which patients are neither reimbursed
by Medicare nor covered by a Managed Care arrangement. These payors include
traditional insurance indemnity plans as well as direct payments by patients.
With respect to outpatient revenues, this category also includes personal injury
insurance coverage. With respect to both inpatient and outpatient revenues, the
Company anticipates that in the future, in line with general health care
industry trends, the percentage of revenues derived from traditional Medicare
and Medicaid will decrease, and the percentage of revenues derived from Managed
Care and preferred provider arrangements will increase.
CHHFC serves a private pay consumer market; however, given the preventive
medicine orientation of HMOs, many will reimburse for fitness services.
Currently, CHHFC is negotiating preferred provider contracts with such agencies.
CHHFC also offers corporate contracts for employers interested in providing such
services to their employees.
Quantum provides services as a subcontractor to clinical research companies
hired by pharmaceutical companies whose drugs are tested at facilities such as
Kirkbride. Quantum began generating revenue in 1999.
(B)(7) PATENTS, TRADEMARKS, LICENSES, ETC.:
The Company has no patents or trademarks that are material to its
operations. Various licenses are required for the operation of Kirkbride and
Westmeade Centers, and other company operations. See "Governmental Approvals"
below.
17
<PAGE>
(B)(8) GOVERNMENTAL APPROVALS:
Kirkbride is licensed by the Department of Public Welfare, Office of Mental
Health, for the Commonwealth of Pennsylvania for Inpatient Private Psychiatric
Hospital, a Partial Hospital, an outpatient clinic, and by the Pennsylvania
Department of Health as a drug and alcohol rehabilitation center; additionally
57 of the hospital's inpatient psychiatric beds hold dual licenses with both
Departments.
The Westmeade Center at Warwick is licensed for 32 beds by the Pennsylvania
Department of Public Welfare, Office of Children, Youth and Families, as a
Residential Treatment Facility for Children and Adolescents. The Westmeade
Center at Kirkbride is licensed by the Department of Public Welfare for
Residential Treatment of Adults for 24-beds.
The Kirkbride and Westmeade Centers operate with a Certificate of
Accreditation from the Joint Commission on the Accreditation of Health-Care
Facilities. In July 1998, the Westmeade Center at Warwick received a three-year
accreditation; The Kirkbride Center received a three-year accreditation in
December 1998.
CHHFC operates as a "Health Club" under a Certificate of Compliance issued
by the Attorney General of the Commonwealth of Pennsylvania, Bureau of Consumer
Protection, pursuant to the Pennsylvania Health Club Act.
(B)(9) GOVERNMENTAL REGULATIONS:
Health care is an area of extensive federal, state and local regulation.
Changes in the law or new interpretations of existing laws can have a dramatic
effect on methods of doing business, costs of doing business and amounts of
reimbursement by government and private third party payors. The health care
industry is subject to state laws governing certification, professional
licensure, certificate of need requirements and physician and other health care
provider self-referrals. In addition, state regulation of Medicaid
reimbursement directly impacts the profitability of servicing Medicaid patients.
Federal regulations covering fraud and abuse, and arrangements among health care
providers that may be deemed under Medicare/Medicaid regulations as fraud and
abuse or self-referral arrangements, can limit the ways in which the Company
conducts business. No assurance can be given that federal and state
regulations, administrative actions pursuant to such regulations, or changes in
such regulations will not adversely affect the Company.
In addition, numerous federal legislative proposals have been initiated
which contemplate significant changes in the availability, delivery, pricing and
payment for health medical products and services. Various states also have
undertaken or are considering significant health care reform initiatives.
Although it is not possible to predict the exact manner and the extent to which
the Company will be affected by the passage of health care "reform" measures or
other legislative or administrative initiatives, it is virtually certain that
health care delivery, reimbursement of health care costs, and virtually every
other aspect of the health care industry will be the subject of legislative and
administrative initiatives in the future. It is likely that the Company will be
affected in some fashion by any new legislative and administrative measures,
which are adopted, and such effects could be material and adverse to the
business of the Company.
18
<PAGE>
Most states have laws, regulations and professional licensing board legal
doctrines which prohibit the employment of physicians by corporations other than
professional corporations with all stockholders being licensed persons. Certain
states have legislation or regulations, or rulings or opinions of courts or
state officials, suggesting that other health care professionals may not
lawfully provide services as employees of business corporations. To the extent
that such restrictions are or become applicable to the Company's operations, the
Company must structure its operations to be in compliance with such provisions.
There is no assurance, however, that the Company will develop a satisfactory
structure to deal with all such restrictions.
(B)(10) RESEARCH AND DEVELOPMENT: Not Applicable.
(B)(11) ENVIRONMENTAL LAWS:
The Company's operations are not significantly affected by environmental
regulations.
(B)(12) EMPLOYEES:
As of December 31, 1998, the Company and its subsidiaries had approximately
400 full-time and part-time employees. This number does not include mental
health professionals (e.g., psychiatrists, psychologists, etc.) who provide
services through the Company's facilities and who may be deemed employees for
federal tax and accounting purposes. Kirkbride Center represents the highest
concentration of Company employees with a total of 438.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company owns or leases the following properties.
<TABLE>
<CAPTION>
PROPERTY LOCATION OWN / LEASE DESCRIPTION
- ------------ ---------------- ----------- ----------------------------------------
<S> <C> <C> <C>
Kirkbride Philadelphia, PA Own 422,800 square feet on 27 acres
Center
- ------------
Westmeade at Hartsville, PA Own 14,000 square feet on 11 acres
Warwick
- ------------
Wayne Office Wayne, PA Lease 5,449 square feet; Lease expires 7/31/99
- ------------ ---------------- ----------- ----------------------------------------
Lakewood Stroudsburg, PA Own Approximately 57 acres
- ------------ ---------------- ----------- ----------------------------------------
</TABLE>
ITEM 3 - LEGAL PROCEEDINGS
An affiliate of UNION CHELSEA NATIONAL BANK holds a mortgage foreclosure
judgment against property comprising the site of CENTER AT LAKEWOOD, which is
owned by LAKEWOOD RETREAT, INC., a subsidiary of CRCS. Pursuant to a loan
modification agreement executed in April 1995, and furthers extension
agreements, Union Chelsea agreed to take no action to enforce this judgment
before September 16, 1996. CRCS has requested continued forbearance by the
lender while CRCS attempts to sell the property or refinance the mortgage. The
lender, while cooperating with CRCS to sell the property, has not agreed to any
further extensions. If the lender were to commence enforcement of its
foreclosure judgment, CRCS would be required to submit the Deed in satisfaction
of the indebtedness or seek bankruptcy court protection for the subsidiary that
holds title to the property. As of 12/31/1998, the book value of the property
was judged to be 1.1 million dollars.
19
<PAGE>
In July, 1996, a lawsuit was filed in the Superior Court of New Jersey,
Somerset County by certain therapists formerly associated with CRCS
subsidiaries, AMERICAN INSTITUTE FOR BEHAVIORAL COUNSELING, INC. and PENN
INTERPERSONAL COMMUNICATIONS, INC. The complainant names these subsidiaries as
defendants as well as CRCS, Anthony and Marlene Todaro, Thomas Fleming and Rose
DiOttavio. The suit alleges that the Plaintiffs were damaged because the fees
charged, by CRCS' subsidiaries for providing office space and management
services, exceeded the reasonable value of the services provided. The suit also
claims that CRCS' subsidiaries have not remitted to the Plaintiffs an
unspecified amount of fees collected from patients by the subsidiaries which
allegedly were to have been remitted to the plaintiffs. The suit also alleges
that the defendants tortuously interfered with the plaintiffs' contractual
relationships with patients and managed care companies and defamed the
plaintiffs. The complaint does not specify the damages sought by the
plaintiffs. Management does not believe there is any validity to these claims.
CRCS does not believe that the ultimate resolution of this litigation will have
a material, adverse effect upon the business, finances or affairs of CRCS.
In November, 1998, a former employee of CoreCare filed a complaint in
Federal District Court for the Eastern District of Pennsylvania alleging that
the Company discriminated against her in employment by failing to accommodate
her disability, and that the Company retaliated against her for filing a workers
compensation claim. The Company has denied all of these claims. The
plaintiff's complaint asks for compensatory and punitive damages in excess of
$100,000. We believe that the ultimate resolution of this claim will not have a
material, adverse effect on CoreCare's operations or financial condition.
CRCS is subject to professional malpractice and related claims from time to
time in the ordinary course of business. CRCS maintains insurance against such
claims. Insurers are defending all such claims, and, except as discussed above,
CRCS is confident that it's ultimate liability or settlement obligation in such
claims will be within policy limits.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- Election of Directors
- Increase of 2 million shares for the employee stock option
plan Both matters were approved by Shareholders at the October 29, 1998
Shareholder Meeting.
20
<PAGE>
PART II
-------
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
(A) MARKET INFORMATION:
--------------------
The Company's Common Stock is traded over-the-counter on the electronic
bulletin board operated by the National Association of Securities Dealers under
the symbol "CRCS." The following table sets forth the high and low bid prices
quoted for the Company's Common Stock since January 1, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -----
CALENDAR YEAR 1996
- ------------------
<S> <C> <C>
First Quarter 1 5/8 1 1/4
Second Quarter 3 3/8 1 3/8
Third Quarter 2 1 1/4
Fourth Quarter 3 7/8 2 5/8
CALENDAR YEAR 1997
- ------------------
First Quarter 1 7/8 11/5
Second Quarter 1 7/8 3/4
Third Quarter 2 3/4
Fourth Quarter 1 1/8 22/32
CALENDAR YEAR 1998
- ------------------
First Quarter 1.03 .81
Second Quarter 1 24/25 24/25
Third Quarter 1 1/4 3/4
Fourth Quarter 1 7/16 5/8
</TABLE>
(B) HOLDERS:
--------
As of December 31, 1998, there were approximately 573 record holders of the
Company's Common Stock.
(C) DIVIDENDS:
----------
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that all future earnings will be
retained by the Company to support its growth strategy. Accordingly, the
Company does not anticipate paying cash dividends on the Common Stock in the
foreseeable future. In addition, dividends on Common Stock cannot be paid
until all dividends in arrears on the preferred stock have been paid. The
payment of dividends on Common Stock will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of the
Company, contractual restrictions and general business conditions. The
Company's term loan and revolving credit facility prohibits the payment of
dividends without the consent of the lenders.
21
<PAGE>
For information concerning dividend rights of holders of the Company's
Preferred Stock, see "Part I, Item 8 - Description of Securities."
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto.
(A) INTRODUCTION:
The Company, through eight of its wholly owned actively operating
subsidiaries, provides, owns and operates inpatient and outpatient behavioral
health care services and facilities; provides management and billing services to
health care providers; operates a health and fitness center; and provides
investigative services for the pharmaceutical and clinical research
organizations.
On April 15, 1998, the Company acquired certain assets and scheduled
liabilities of Preferred Medical Services, Inc., a physician billing and
practices management business. The purchase price was $260,000, less the amount
of outstanding billed accounts receivable as of the closing date, payable in
cash and a demand note in the amount of $111,744.36, and 250,000 shares of the
Company's common stock.
On March 1, 1998, the Company sold certain assets, properties and goodwill
of the American Institute for Behavioral Counseling, Inc. ("Greenbrook") to a
Delaware limited liability corporation that will manage the operations and
liquidate certain remaining assets and liabilities. The assets were sold for
their net book value without a material impact of gains. As a result of this
divestiture, the Company should eliminate annualized losses of approximately
$150,000. The purchase price was $25,000 payable with the assumption of certain
liabilities together with receivables collected by the new owner on behalf of
the Company through July 31, 1998.
On December 1, 1998 the company sold certain assets, properties, and
goodwill of the Penn Interpersonal Communications, Inc. to a Delaware limited
liability corporation that will manage the operations and liquidate certain
remaining assets and liabilities. The assets were sold for their net book value
without a material impact of gains. As a result of this divestiture, the Company
should eliminate annualized losses of approximately $100,000. The purchase
price was $30,000 and the assumption of certain liabilities together with
receivables collected by the new owner on behalf of the Company through July 31,
1998.
22
<PAGE>
(B) RESTATEMENT FOR 1998
Subsequent to the issuance of the Company's consolidated financial statements
for the year ended December 31, 1998, it was determined that the reported 1998
results were overstated. Upon examination, it was determined that certain
revenue and accounts receivables were over accrued, while certain expenses were
understated due to an inadequate provision of accrued unpaid expenses.
The Company restated its 1998 loss to approximately $8,939,044. This is an
increase of $4,348,423 versus the previously reported loss of $4,590,621. The
details of the components of this loss are discussed below.:
The 1998 revenue was overstated by $1,875,000. This adjustment was due to
the over accruing of net patient revenue and the related accounts
receivable. This was primarily caused by:
1. Inadequate calculation of contractual allowances for Medicare
patients of $700,000 and for potential Medicaid patients of
$275,000.
2. Accounts receivable adjustments of $300,000 associated with
computer system errors related to net patient revenue.
3. Inadequate reserves to provide for retroactive payor changes and
patient day denials of $600,000.
The 1998 expenses were understated by $2,475,000 due to the inadequate
provision of accrued unpaid expenses and incorrect recording of journal
entries. The items in this category consist of:
1. Lack of a provision for the cost of tail coverage for the claims
made malpractice insurance coverage. This amount is $128,000.
2. Interest expense and property taxes on a discontinued operation
were not accrued in the amount of $820,000.
3. A provision was not made for certain state and local taxes that
are not related to the Corporation's net income but rather to the
capital structure or to the net revenue of the Corporation. These
amounted to $69,000.
4. Interest expense and commission due on certain of the Company's
notes was not adequately provided for. These amounted to
$414,000.
5. A provision was not made for commissions of $84,000 to be paid on
a terminated lease.
6. Certain expense items received after the end of the year for
services rendered during the year were not provided for. These
amounted to $460,000. The items included legal fees, provision
for retrospective adjustment of certain insurance expense and a
general provision for unrecorded liabilities.
7. Certain prepaid expenses and deposits that should have been
written off were not. These amounted to $300,000.
8. Pharmacy expenses in the amount of $200,000 were not recognized.
As a result, the accompanying consolidated financial statements as of and for
the year ended December 31, 1998 present the restated results.
A summary of the effects of the restatement follows:
<TABLE>
<CAPTION>
1998 1998
PREVIOUSLY RESTATED
REPORTED
<S> <C> <C>
Net Revenues $21,617,054 $19,948,895
Income (Loss) from Operations $(2,734,793) $(6,025,624)
Net Income (Loss) $(4,590,621) $(8,939,044)
</TABLE>
23
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
<TABLE>
<CAPTION>
ASSETS
December 31, 1998
-------------------------------
As previously
Reported Restated
------------------ -----------
<S> <C> <C>
Current assets:
Cash $ 115,242 $ 115,242
Accounts receivable, net 5,588,188 4,411,418
Prepaid and other current assets 224,215 175,659
------------------ -----------
Total current assets 5,927,645 4,702,319
------------------ -----------
Contract rights, net of accumulated amortization
of $1,023,619 in 1998 and $531,011 in 1997 265,300 265,300
------------------ -----------
Real estate and other assets held for sale 1,100,000 1,100,000
------------------ -----------
Property, plant and equipment, net 14,151,787 14,151,787
------------------ -----------
Other assets:
Goodwill, net of accumulated amortization
of $496,924 in 1998 and $257,598 in 1997 1,527,981 1,705,231
Deferred finance costs, net of accumulated
amortization of $1,759,635 in 1998 and
$241,648 in 1997 443,172 443,172
Security deposits 109,334 10,467
Restricted cash 207,041 207,041
Other 981,436 609,610
------------------ -----------
3,268,964 2,975,521
------------------ -----------
$ 24,713,696 $23,194,927
================== ===========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1998
----------------------------------
As Previously
Reported As Restated
------------------- -------------
<S> <C> <C>
Current liabilities:
Line of credit $ 4,308,703 $ 4,308,703
Current portion of:
Long-term debt 15,199,388 16,191,983
Lease termination fee payable 38,565 38,565
Account payable 3,748,884 3,748,882
Advances, officers-shareholders 910,692 1,332,692
Accrued expenses 840,354 1,851,026
Payroll and payroll taxes payable 3,048,183 3,048,183
Due to Medicare 1,000,000 1,692,389
------------------- -------------
29,094,769 32,212,423
------------------- -------------
Long term liabilities:
Notes payable 2,098,907 2,098,907
Lease termination fee 93,467 93,467
------------------- -------------
2,192,374 2,192,374
------------------- -------------
Shareholders' deficiency:
Preferred stock 17 17
Common stock 15,949 15,949
Additional paid in capital 11,374,340 11,086,340
Accumulated deficit (17,963,753) (22,312,176)
------------------- -------------
(6,573,447) (11,209,870)
------------------- -------------
$ 24,713,696 $ 23,194,927
=================== =============
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, 1998
----------------------------------------
As Previously
Reported Restated
-------------------------- ------------
<S> <C> <C>
Revenue:
Patient services, net $ 18,125,610 $16,457,451
Management services 1,962,803 1,962,803
Health and fitness center 450,625 450,625
Rental income 1,078,016 1,078,016
-------------------------- ------------
21,617,054 19,948,895
-------------------------- ------------
Direct costs:
Patient services 8,684,360 8,884,360
Management services 842,438 842,438
Health and fitness center 278,774 278,774
-------------------------- ------------
9,805,572 10,005,572
-------------------------- ------------
Gross profit 11,811,482 9,943,323
-------------------------- ------------
Operating expenses:
Salaries and employee benefits 3,418,430 3,552,430
Selling and administrative 5,906,911 6,994,583
Amortization 2,423,054 2,423,054
Depreciation 482,360 482,360
Provision for bad debts 1,946,140 2,147,140
Impaired asset write down 369,380 369,380
-------------------------- ------------
Total operating expenses 14,546,275 15,968,947
-------------------------- ------------
Income (loss) from operations (2,734,793) (6,025,624)
-------------------------- ------------
Non-operating expenses:
Interest expense 1,855,828 2,913,420
-------------------------- ------------
1,855,828 2,913,420
-------------------------- ------------
Net loss $ (4,590,621) $(8,939,044)
========================== ============
Basic net loss per share $ (0.33) $ (0.65)
========================== ============
Diluted net loss per share $ (0.33) $ (0.65)
========================== ============
Weighted average number of
common shares
</TABLE>
26
<PAGE>
(C) RESTATEMENT FOR 1997
In its Registration Statement on Form 10-SB, the Company reported a loss
from operations of $(460,259) for the year ended December 31, 1997, a loss
before income tax benefit of $(2,586,076) and net income after income tax
benefit of $1,197,656. Subsequent to the filing of the Company's Form 10-SB,
the Company determined that the reported 1997 results were overstated due to
over-accrual of revenues. The Company over-accrued amounts due from a
significant third party payor, resulting from a miscalculation of the allowable
per diem charges for in-patient services. Primarily as a result of the
restatement of these revenues, the Company's loss from operations is anticipated
to be restated from ($460,259) to approximately $(2,840,259).
Based on the prior calculation of the allowable per diem charges for
inpatient services, at the time the 1997 financial statements were issued and at
the time the 10-SB was filed, Management's estimates permitted the Company to
record a deferred tax benefit in 1997 in accordance with SFAS 109. Had the
recalculated per diem charge been used in Management's estimates, the deferred
tax benefit would not have been recognized. As a result, the Company's 1997
results will be restated to eliminate the $3,783,732 income tax benefit
previously reported. As a result of the elimination of this income tax benefit
and the reduction in revenues, the Company's previously reported net income of
$1,197,656 in 1997 will be restated to a net loss of $(4,966,076).
<TABLE>
<CAPTION>
1997 1997
PREVIOUSLY RESTATED
REPORTED
------------ ------------
<S> <C> <C>
Net Revenues $12,854,184 $10,465,184
Income (Loss) from Operations $ (460,259) $(2,840,259)
Net Income (Loss) $ 1,197,656 $(4,966,076)
</TABLE>
A summary of the effects of the restatement follows:
27
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Restatement (continued):
ASSETS
December 31, 1997
---------------
As Previously
Reported As Restated
-------------- ------------
<S> <C> <C>
Current assets:
Cash $ 304,267 $ 304,267
Accounts receivable, net 4,955,473 2,575,473
Prepaid & other current assets 212,367 212,367
Deferred income taxes 1,555,000
------------
Total current assets 7,027,107 3,092,107
-------------- ------------
Contract rights, net of accumulated
amortization of $1,023,619 in 1998
and $531,011 in 1997 548,663 548,663
-------------- ------------
Real estate and other assets
held for sale 1,513,723 1,513,723
-------------- ------------
Property, plant and equipment net 10,727,385 10,727,385
-------------- ------------
Other assets:
Goodwill, net of
accumulated amortization
of $496,924 in 1998
and 257,598 in 1997 1,801,155 1,801,155
Deferred finance costs,
net of accumulated
amortization of
$1,759,635 in 1998 and
$241,648 in 1997 305,354 305,354
Security deposits 108,468 108,468
Restricted cash 197,394 197,394
Deferred income taxes 2,228,732
Other 247,232 247,232
-------------- ------------
4,888,335 2,659,603
-------------- ------------
$ 24,705,213 $ 18,541,481
============== ============
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1997
-------------------
As Previously
Reported As Restated
------------------- ---------------
<S> <C> <C>
Current liabilities:
Line of credit $ 1,582,240 $ 1,582,240
Current portion of:
Long-term debt 10,203,425 10,203,425
Lease termination fee payable 38,565 38,565
Obligations under capital lease 71,763 71,763
Accounts payable 2,275,442 2,275,442
Advances, officers-shareholders 1,013,428 1,013,428
Accrued expenses 2,091,675 2,091,675
Payroll and payroll taxes payable 1,688,105 1,688,105
------------------- ---------------
Total current liabilities 18,964,643 18,964,643
------------------- ---------------
Long term liabilities:
Notes payable 2,192,798 2,192,798
Lease termination fee payable 93,467 93,467
------------------- ---------------
2,286,265 2,286,265
------------------- ---------------
Commitments and contingencies
Company obligated mandatorily
redeemable Series E convertible
preferred stock (redemption value
$943,400 in 1998 and 1997) 1,293,271 1,293,271
------------------- ---------------
Shareholders' equity (deficiency):
Preferred stock 26 26
Common stock 12,694 12,694
Additional paid in capital 9,357,714 9,357,714
Accumulated deficit (7,209,400) (13,373,132)
------------------- ---------------
2,161,034 (4,002,698)
------------------- ---------------
$ 24,705,213 $ 18,541,481
=================== ===============
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
December 31, 1997
-------------------
As Previously
Reported As Restated
------------------- -------------
<S> <C> <C>
Revenue:
Patient services, net $ 10,050,834 $ 7,670,834
Management services 1,760,075 1,760,075
Health and fitness center 521,414 521,414
Rental income 512,861 512,861
------------------- -------------
12,845,184 10,465,184
------------------- -------------
Direct costs:
Patient services 4,753,042 4,753,042
Management services 254,269 254,269
Health and fitness center 304,055 304,055
------------------- -------------
5,311,366 5,311,366
------------------- -------------
Gross profit 7,533,818 5,153,818
------------------- -------------
Operating expenses:
Salaries and employee benefits 2,716,304 2,716,304
Selling and administrative 3,730,504 3,730,504
Amortization 677,067 677,067
Depreciation 279,546 279,546
Provision for bad debts 590,656 590,656
Impaired assets write down - -
Total operating expenses 7,994,077 7,994,077
------------------- -------------
Income (loss) from operations (460,259) (2,840,259)
------------------- -------------
Non-operating expenses:
Interest expense 1,844,284 1,844,284
Factor fees 281,533 281,533
------------------- -------------
2,125,817 2,125,817
------------------- -------------
Net income (loss) before
income tax benefit (2,586,076) (4,966,076)
Income tax (benefit) expense 3,783,732
-------------------
Net income (loss) $ 1,197,656 $ (4,966,076)
=================== =============
Basic net income (loss) per share $ .11 $ (.44)
=================== =============
Diluted net income (loss) per share $ .08 $ (.44)
=================== =============
Weighted average number of
common shares outstanding 11,326,617 11,326,617
=================== =============
</TABLE>
30
<PAGE>
(C) RESULTS OF OPERATIONS:
(C)(1) 1998 VERSUS 1997:
Revenues:
- ---------
Operating revenues in 1998 increased by $9,483,711, or 91%, from $10,465,184 in
1997 to $19,948,895 in 1998. The increase was primarily due to improvements in
Net Patient Service Revenues, which increased by $8,786,617 from $7,670,834 in
1997 to $16,457,451, as a result of a 114% increase in patient days in 1998 at
the Kirkbride Center and at Westmeade at Warwick.
- - Acute inpatient days at the Kirkbride Center increased by 134% to 29,320
in 1998 from 12,489 in 1997 due primarily to:
1. Improvement in market awareness of Kirkbride programs and a greater
number of referral sources.
2. Temple University affiliation
3. Increase in admissions related to the new programs added to Corecare
Systems, Inc.'s continuum of services, especially the new drug and alcohol
rehabilitation programs.
- - Kirkbride Center opened a 43 bed licensed drug and alcohol rehabilitation
center in July 1998 which was then expanded to 63 beds in February, 1999.
- - Kirkbride Center entered into contracts with the Federal Probation
Department in 1998 to provide psychiatric and substance abuse services.
<TABLE>
<CAPTION>
KIRKBRIDE CENTER - INPATIENT ACTIVITY STATISTICS
1997
- ----
QUARTER 1st 2nd 3rd 4th
- ---------------------------- ----- ----- ------
<S> <C> <C> <C> <C>
Admissions 289 504 622
- ---------------------------- ----- ----- ------
Average Length of Adult Stay 8.56 8.93 8.86
- ---------------------------- ----- ----- ------
Patient Days 2,295 4,467 5,524
- ---------------------------- ----- ----- ------
Average Daily Census 25.2 48.6 60.0
- ---------------------------- ----- ----- ------
1998
- ----------------------------
QUARTER 1st 2nd 3rd 4th
- ---------------------------- ----- ----- ----- ------
Admissions 726 735 787 831
- ---------------------------- ----- ----- ----- ------
Average Length of Adult Stay 9.29 10.34 11.49 12.65
- ---------------------------- ----- ----- ----- ------
Patient Days 6,898 7,599 9,044 10,512
- ---------------------------- ----- ----- ----- ------
Average Daily Census 76.6 83.5 98.3 114.3
- ---------------------------- ----- ----- ----- ------
</TABLE>
Terms Defined:
- ---------------
Admissions
- A patient which a doctor has diagnosed as requiring inpatient hospital
treatment.
Patient Days
- Each patient that is in an inpatient hospital bed at midnight is
counted as one patient day.
31
<PAGE>
Terms Defined Continued:
- --------------------------
Average Length of Stay
- Total inpatient days, including acute care plus drug and alcohol,
divided by the total number of admissions during the period
Average Daily Census
- The average number of patients in the hospital.
Management Services Revenues increased by $202,728 from $1,760,075 in 1997
to $1,962,803 in 1998 primarily as a result of the assets acquisition of
Preferred Medical Services in July 1998, which was partially offset by the
expiration of the management contract with St. Luke's/Quakertown Hospital in
June 1998.
Revenue from the Health and Fitness Center declined by $70,789 from
$521,414 in 1997 to $450,625 in 1998 due to a decline in membership resulting
from increased competition and operating difficulties with the physical plant.
Rental Income increased by $565,155 from $512,861 in 1997 to $1,078,016 in
1998 due to increased space leased to third parties at the Kirkbride Center as
well as the full year of rental income in 1998 as compared to a partial year in
1997 for leases signed in 1997.
Direct Costs:
- --------------
Direct costs increased 88.4% from 5,311,366 in 1997 to $10,005,572 in 1998
primarily due to increases in Patient Services of $4,131,318 and Management
Services of $588,169, which were partially offset by reductions of $25,281 at
the Health and Fitness Center. Direct costs declined as a percentage of total
revenue from 51% to 50%.
Cost of Patient Services increased by $4,131,318 from $4,753,042 in 1997 to
$8,884,360 in 1998 due to increased census at Kirkbride and at Westmeade at
Warwick. Patient Services Expenses declined as a percentage of total revenue
from 45.4% in 1997 to 44.5% in 1998 due to improved staffing controls. The
Company established a CoreFlex staffing policy to maintain staffing at efficient
levels per occupied bed as census fluctuates. A centralized staffing coordinator
department manages staffing on an integrated basis throughout the company.
Cost of Management Services increased by $588,169 from $254,269 to $842,438
in 1998 primarily as a result of costs associated with the Preferred Medical
Services acquisition.
Cost of the Health and Fitness Center decreased by $25,281 from $304,055 to
$278,774 as the company adjusted staffing commensurate with the decline in
membership.
Gross Profits:
- ---------------
Gross profits increased by $4,789,505 or 92.9% from $5,153,818 in 1997 to
$9,943,323 in 1998. The Gross Margin increased from 49.2% in 1997 to 49.8% in
1998.
32
<PAGE>
Operating Expenses:
- --------------------
Operating expenses increased by $7,974,870 from $7,994,077 to $15,968,947
primarily due to increases of $3,264,079 in Selling and Administrative Expense,
$1,745,987 in Amortization Expense, $1,556,484 in Bad Debt Expense, and Salaries
Expense of $836,126.
Salaries and Employee Benefits expense increases were attributable to
higher staffing levels necessary to service the increase in average daily
census. Salaries and Employee Benefits decreased as a percentage of total
revenue from 26.0% in 1997 to 17.8% in 1998 due to operating efficiencies
achieved at the higher revenue level in 1998. 1997 was a start up year at the
Kirkbride Center. Comparisons between 1998 and 1997 is difficult as a portion
of these costs were included in a third party management contract for the
Kirkbride Center which are shown in Selling and Administrative Expense in 1997.
Selling and Administrative Expense increased by $3,264,079 from $3,730,504
to $6,994,583 due to costs associated with internally managing the Kirkbride
Center resulting from the increase in average daily census. Selling and
Administrative Expense declined as a percentage of total revenue from 35.6% to
35.0%.
- Due to the 1997 Management Contract being allocated to Salaries and
Administrative Expenses; a relevant comparison is the combined costs
of these categories which declined from 61.6% to 52.9% in 1998,
reflecting improvements in operating efficiencies.
Amortization Expense increased primarily due to Deferred Finance Costs
associated with the WRH mortgage, which were fully amortized over the one-year
term of the financing.
Depreciation Expenses increases were attributable to the investments in the
Kirkbride Center necessary to generate Rental Income.
Provision for Bad Debt Expense increased due to difficulties associated
with the start-up of the Kirkbride Center operations, lack of historical
experience associated with municipal funded clients.
The Impaired Asset Write Down Expense of $369,380 is attributable to the
Lakewood property. The property is under a letter of intent for sale and its net
book value was reduced to reflect its value under the contemplated sale.
Interest Expense and Factoring Fees declined as the Company refinanced high
cost debt obligations with less costly debt financing. The Company restructured
its factoring arrangement on its receivables in 1998 with Healthcare Financial
Partners to a revolving line of credit.
The Company produced a net loss of ($8,939,044) in 1998 compared to a net
loss of ($4,966,076) in 1997.
33
<PAGE>
(C)(2) 1997 VERSUS 1996:
Revenues:
- ---------
Operating revenues increase by $3,440,880 or 49% from $7,024,304 in 1996 to
$10,465,184 in 1997 primarily as a result of acquisition of the Kirkbride Center
made in early 1997. Revenues of entities acquired in 1997 (including Kirkbride)
from their respective acquisition dates were $8,512,521, or approximately 66% of
consolidated 1997 revenues, as follows:
- Kirkbride Center - 5,138,102, or 49% of revenues;
- Quantum/Managed Mental Health Inc. - (no revenues);
- CoreCare Management, Inc. - $994,419 for the first six months of
1998, or 8% of revenues (this unit has also been used "in house"
to service other operations of the Company);
The balance of 1997 revenue was generated by various subsidiaries of
$4,332,663 or approximately 41% of revenue of which Westmeade represented 20%.
The relative significance, in terms of their contribution to consolidated
revenues, of entities acquired in 1997 was substantially reduced because of
Kirkbride's significance.
Direct Costs:
- --------------
Direct costs in 1997 increased by $2,186,350 from $3,25,016 to $5,311,366
primarily as a result of the entities acquired during the year.
Operating Expenses:
- --------------------
Total Operating Expenses increased by $1,289,535 from $6,704,542 in 1996 to
$7,994,077 in 1997 primarily due to increases in Salaries and Employee Benefits
Expense of $704,354, Selling & Administrative Expense of $204,025, and Bad Debt
Expense of $216,055.
Selling and Administrative Expenses in 1997 increased approximately 5% over
1996 to $3,730,004 or 36% of revenues versus $3,526,479 or 50% of revenues in
1996. This is attributable to the increase in revenues without a comparable
increase in fixed costs reflecting greater operational efficiency. Overhead
efficiency improved due to revenue growth as well as consolidation of
administrative costs. In August 1997, the Company closed its former corporate
office located in Erdenheim, PA and merged such functions with CoreCare
Management, Inc. thereby decreasing annual overhead expenses.
Operating salaries and employee benefits represented 26% and 29% of net
revenues for 1997 and 1996, respectively, due again to the increase in revenues
without a comparable increase in fixed costs.
Depreciation expense increased by $60,610 in 1997, primarily reflecting
the increase in depreciable assets resulting from the Kirkbride acquisition.
34
<PAGE>
Amortization expense increased from $572,576 to $677,067 due to the
increase in debt related costs during 1997.
Interest expense increased by $1,375,426 to $2,125,817 in 1997 primarily as
a result of the acquisition of the Kirkbride Center.
The weighted average number of common shares outstanding in 1997 was
11,326,617 shares, which represented a 29% increase over 1996 levels. Net gain
per common share was $.44 in 1997 from $(.41) in 1996.
ANALYSIS OF 1997 OPERATIONS:
- -------------------------------
In 1996 the Company had only four operating units, consisting of
residential psychiatric treatment facilities (2), outpatient care and a health
and fitness center. In 1997, the Company's operations were carried on in seven
service lines:
1) inpatient hospital at Kirkbride
2) real estate activities at Kirkbride
3) residential psychiatric treatment facilities,
4) outpatients care
5) hospital-based management services
6) health and fitness center
7) billing and practice management
35
<PAGE>
These service lines produced a loss from operations, on a consolidated
basis, primarily attributable to:
1) Startup of inpatient hospital facilities with census levels below
break even;
2) Operating expenses of acquired entities, due in part to inadequate
operating controls, budgets and management information systems.
3) Overhead payroll relative to the Company's revenue base.
4) Rate structures.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities:
- ----------------------
Net Cash Provided {Used} by Operations was ($2,571,178), ($590,800), and
($3,150,013) in 1998, 1997, and 1996, respectively. The decrease in cash
provided by operations in 1998 compared to 1997 was primarily the result of (I)
increase in the net loss which was partially offset by increases in non-cash
expenses for Amortization, Depreciation, and Impaired Asset Write-down, and (II)
increase in accounts receivables of $1,211,806 associated with the rise in
revenue.
Investing Activities:
- ----------------------
Investing activities used $5,680,966, $8,582,284, and $435,332 in 1998,
1997, and 1996, respectively.
Financing Activities:
- ----------------------
The company borrowed $13,151,789, $8,669,095, and $4,678,390 during fiscal
years 1998, 1997, and 1996, respectively. The borrowings in 1997 were primarily
related to the acquisition of the Kirkbride facility and in 1998 the borrowings
were primarily used to refinance the debt associated with the Kirkbride
acquisition and start-up losses. The company repaid $9,311,823, $618,080, and
$2,551,248 in debt during fiscal years 1998, 1997, and 1996, respectively.
On February 27, 1997, the Company through its wholly owned subsidiary
CoreCare Behavioral Health Management, Inc. acquired the real estate, licenses
and other assets of the Institute of Pennsylvania Hospital for $4.5 million, and
named it Kirkbride Center. The Company paid $4,500,000 for the property. The
Company financed the acquisition by borrowing the sum of $6,440,000 from GLN
Capital Co., LLC., an independent real estate company, in exchange for a
Promissory Note secured by a mortgage on the property.
In February 1998, the Company refinanced the property with WRH Mortgage,
Inc. for $13,000,000, using the proceeds to satisfy the mortgage indebtedness to
GLN, to pay for tenant improvements to the property required in connection with
lease commitments, and to satisfy certain short-term indebtedness. The term of
the loan has been extended to June 30, 1999 from March 1, 1999. The loan bears
interest at the London Interbank Offered Rate (LIBOR) plus six and one half
(6.5%) per cent.
On May 21, 1998, certain subsidiaries of the Company, including CoreCare
Behavioral Health Management, Inc., Penn Interpersonal Communications, Inc., and
Managed CareWare, Inc. ("Borrowers") entered into a Loan and Security Agreement
("Loan Agreement") with HCFP Funding, Inc. pursuant to which a revolving line of
credit up to a maximum of $5,000,000 was established. The indebtedness is
evidenced by a promissory note and is secured by a lien on all of the Borrowers'
account receivable.
36
<PAGE>
On December 30, 1998, Philadelphia Ventures and its associated venture
funds as holders of Class E Convertible Preferred Stock delivered notice of its
election to convert 9,933.72 preferred shares into 1,192,046 of common shares.
The transaction did not generate any capital to the company but did increase the
number of common shares outstanding.
In June 1998, the Company was successful in consummating a revolving line
of credit of a maximum of $5,000,000 with HCFP Funding, Inc. secured by the
accounts receivable of four of the Company's subsidiaries. This facility has
improved the Company's liquidity by providing for working capital for services
rendered less than 150 days. Given the growth of the Company additional equity
or debt financing may be required in order to realize its business plan.
In January 1998, the Company entered into a master equipment lease program
with Copelco Capital, Inc. for approximately $396,000, the proceeds of which
were used to finance certain equipment such as computers, telephones, accounting
software and office equipment. The term of the financing is for five years. At
December 31, 1998, approximately $85,000 was available from this facility.
RECENT SALES OF UNREGISTERED SECURITIES
The following sales of securities of the Company took place as indicated
below. Unless otherwise described, all such sales were a result of transactions
that were exempt from registration under the Securities Act pursuant to Section
4(2) of the Securities Act, and the shares of the Company's Common Stock issued
(or issuable in the case of warrants or options granted) were "restricted
securities" as that term is defined in Rule 144 and may be resold only in
compliance with registration provisions of the Securities Act or an exemption
thereunder.
SHARES ISSUED FOR SERVICES - 1998
- --------------------------------------
As of July 1, 1998, the Company issued a total of 711,444 shares of Common
Stock to four consultants and advisors of the Company for consulting and other
services rendered.
ACQUISITION OF ASSETS OF PREFERRED MEDICAL SERVICES, INC.
- ----------------------------------------------------------------
On April 15, 1998, the Company acquired certain assets and scheduled
liabilities of Preferred Medical Services, Inc. ("Preferred,") a billing and
practice management business. Pursuant to the terms of the Assets Acquisition
Agreement, the Company issued on May 4, 1998 a total of 250,000 shares of Common
Stock to stockholders of Preferred. The transaction was exempt from securities
registration as the principals were experienced and knowledgeable in the
industry. In issuing the shares to the two shareholders of Preferred Medical,
the Company relied on the exemption from registration under Section 4(2) of the
Securities Act. The Company relied on 4(2) because there were only two
offerees, both of whom were knowledgeable in the Company's industry, and, the
Company believes, in financial matters generally; the transaction was a
negotiated sale of a business in which the Company believed the two shareholders
were advised by counsel; and the shares issued were "restricted securities" and
had transfer restrictions placed on them which are customary for restricted
securities.
37
<PAGE>
1998 - SHARES ISSUED TO EMPLOYEES UNDER COMPANY 1996 STOCK PLAN
- -------------------------------------------------------------------------
Out of the shares reserved for issuance pursuant to the Company's 1996
Stock Plan, as of July 1, 1998, the Company issued a total of 62,300 shares of
Common Stock to a total of 199 employees of the Company. These transactions were
exempt from registration under the Securities Act pursuant to Rule 701 under the
Securities Act. The shares of Common Stock issued are restricted securities as
that term is defined in Rule 144 and may be resold only in compliance with the
registration provisions of the Securities Act or an exemption thereunder.
FEBRUARY 1998 INVESTMENT
- --------------------------
In consideration of the payment of $.50 per share, on February 26, 1998,
the Company issued a total of 250,000 shares of Company Stock to two accredited
investors. In connection with the sale, the company further agreed that for a
period of one-year beginning May 18, 1998, the investors shall have the right to
require the Company to repurchase the shares for $1.00 per share. The
transactions with the investors were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act. The shares of
Common Stock issued to the investors are restricted securities as that term is
defined in Rule 144 and may be resold only in compliance with the registration
provisions of the Securities Act or an exemption thereunder.
NOTES AND WC/WD WARRANTS
- ---------------------------
Between November 1995 and February 1996, in separately negotiated
transactions, the Company borrowed a total of $359,750 from eight individual,
accredited investors, for a term of one year from the date of investment. The
debts were evidenced by Promissory Notes bearing interest initially at 7% per
annum and later by amendment at 10% per annum. In addition, the investors
received warrants to purchase an aggregate of 334,771 shares of the Company's
Common Stock at $1.125 per share. None of the investors were previously or are
currently affiliated with the Company. The issuance of these securities was
exempt from registration under Rule 506 of Regulation D. Subsequently, during
1997 and 1998, the Company, in consideration of the investors' agreements to
waive alleged defaults under the notes and to forbear payment, issued warrants
to purchase an aggregate of 246,935 shares of the Company's Common Stock at
$1.125 per share, and an aggregate of 418,366 shares of the Company's Common
Stock. The transactions with the lenders were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act. The shares of
Common Stock issued to the lender, and the shares underlying the warrants if
exercised, are restricted securities as that term is defined in Rule 144 and may
be resold only in compliance with the registration provisions of the Securities
Act or an exemption thereunder.
ISSUANCE OF COMMON STOCK TO CONVERT DEBT
- ----------------------------------------------
Pursuant to an agreement dated December 31, 1995, the Company on May 14,
1997 issued 50,000 shares of restricted Common Stock to an investor in exchange
for all outstanding obligations owed to him by the Company's subsidiary
Westmeade Healthcare, Inc. On January 27, 1998, the Company issued 100,000
shares of restricted Common Stock to the investor as payment in full for
CoreCare Behavioral Health Care, P.C., a Pennsylvania professional corporation
owned by the investor.
38
<PAGE>
OUTLOOK-LIQUIDITY AND CAPITAL RESOURCES
Interest payments on the notes, maturity of certain debt obligations, and
liabilities associated with accrued payroll taxes and Medicare represent
significant liquidity requirements for the company in 1999. The company believes
that the revenue increases and operating results realized from improvements in
average daily census and operational efficiencies will permit it to refinance
many of its debt and liability obligations with a medium term or long term
structured debt financing. The appraised values of the Company's two facilities
far exceed the current book value and debt level on the Company's balance sheet.
The Company is highly confident that its short-term liabilities can be
restructured into long-term mortgage debt.
Medicare is a cost based reimbursement program. The Company had substantial
growth in non-Medicare and Drug and Alcohol Rehabilitation, which decreased the
percentage of Medicare patients in 1998 versus 1997. This resulted in
anticipated payments due to Medicare of $1,000,000. The Company has established
a reserve account with Healthcare Financial Partners so that such funds will be
available to the Company when due.
YEAR 2000
The company believes its internal systems are mostly in compliance with Year
2000 protocol. At this time there are a few non-critical systems which are not
in compliance but have been identified and the Company believes these systems
will be corrected before year-end.
The Company is dependent upon vendors and third party payors, clients and
is surveying them to ascertain their preparedness. The Company is developing
contingency plans to protects its ability to financially operate in the event
critical third parties have systems problems resulting from failure to be in
Year 2000 compliance.
The Company's total cost is estimated to be $200,000 for Year 2000
compliance.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Philadelphia, State of Pennsylvania, on April 8, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on April 8, 1999
SIGNATURE TITLE
/s/ Thomas T. Fleming Chairman of the Board
- ------------------------
Thomas T. Fleming
/s/ Rose S. DiOttavio President and Director
- ------------------------
Rose S. DiOttavio
/s/ Thomas X. Flaherty Director
- -------------------------
Thomas X. Flaherty
/s/ George P. Stasen Director
- -----------------------
George P. Stasen
/s/ Charles A. Burton Director
- ------------------------
Charles A. Burton
/s/ Brad Barry Executive Vice President &
- ----------------
Brad Barry Chief Financial Officer
ITEM 7 - FINANCIAL STATEMENTS
The financial statements can be found at the end of this report beginning
on page 55.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
40
<PAGE>
PART III
--------
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
As of March 1999, the directors, executive officers, and senior managers of
the Company are as follows:
<TABLE>
<CAPTION>
DIRECTORS & OFFICERS:
NAME AGE POSITION
<S> <C> <C>
Thomas T. Fleming 72 Chairman of the Board of
Directors and CEO
Rose S. DiOttavio 48 President, Treasurer and a Director
Thomas X. Flaherty 38 Director
George P. Stasen 53 Director
Charles A. Burton 53 Director
Brad Barry 54 Executive Vice President &
Chief Financial Officer
Keith Day, MBA 42 Senior Vice President &
Corporate Secretary
Mark Novitsky, M.D. 45 Senior Vice President &
Corporate Medical Director
Fred Baurer, M.D. 41 Senior Vice President &
Medical Director, Kirkbride Center
John Schrogie, M.D. 63 Senior Vice President
John Fleming 44 Vice President Development
Ella M. Bowen, ED.D. 53 Vice President of Community
Relations and Public Affairs
Meg Givnish-Mercer 59 Vice President for Education and
Training
Daniel B. LoPreto, Ph.D. 39 Vice President of Quality
Management
Albert Campana, MBA 48 Vice President for Core Services &
Risk Management and Kirkbride
& Senior Director of Administrative
Services
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
SENIOR MANAGERS:
NAME POSITION
<S> <C>
David Baron, D.O., FACN Director of Clinical Research
Ernest J. Ritacco, CPA, MBA Director of Finance
Jeff Friedman, Ph.D., L.S.W. Clinical Director of Westmeade
at Warwick
Roberta K. Mainiero, MBA Controller - CMI / Director of
Practice Management
Erwin A. Carner, Ed.D., MSW Sr. Director of Geriatric Continuum
Sharon Irwin Sr. Director of Mental Health
Continuum
Laura Jones Sr. Director Substance
Abuse Continuum
Margaret Halas Director of CoreCare Management Inc.
Dennis Fontana Director of Management Information
Systems
William Chambley Director of Human
Resources
</TABLE>
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified. John Fleming, Vice
President of Corporate Development is the son of the Chief Executive Officer,
Thomas T. Fleming. No director receives any compensation for serving as a
director.
BOARD OF DIRECTORS:
- ---------------------
THOMAS T. FLEMING has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since January 31, 1995, and has served in
comparable positions with present subsidiaries of the Company since 1991.
Mr. Fleming has over 25 years experience in health care operations,
financing, manufacturing, marketing and real estate development. Specifically,
he was the founder in 1973 of Horsham Clinic and Horsham Psychiatric Group
(includes Wyoming Valley Clinic, The Meadows, The Cloisters at Pine Island);
Senior Vice President of Howmet Corporation; a former Financial Consultant for
Envirodyne, Inc.; Chairman of Capital Home Care Group; Managing Director of UMS
Communities, Inc.; and a General Partner of Holmstead Properties; and has been
Chairman of Health Ventures Limited, a consulting firm specializing in the
health field since 1986. Mr. Fleming also has served as a consultant on various
third-party acquisition transactions including the sale of developed properties
for construction of two personal care homes (JAD Development), acquisition of
Retirement Centers of America from Avon (UMS Corporation), acquisition of Park
Avenue Manor (AmeriCare Partners), financing of Renewal Centers, acquisition and
financing of Whitemarsh Professional Center, acquisition of St. Mary's Hospital
by Neumann Medical Center, and financial restructuring of Senior Lifestyles,
Inc.
42
<PAGE>
Mr. Fleming also has served on numerous civic and corporate Boards of
Directors, including most recently Quality Health Services, Inc.; Renewal
Centers, Inc.; Lifequest; and Chestnut Hill Community Association. Mr. Fleming
also was founder and chairman of the Christmas Revels, is a former Commissioner
of Higher Education of the City of Philadelphia, is a former Chairman of
Chestnut Hill Academy, and a former Chairman of The Philadelphia Council for
Performing Arts. Mr. Fleming received a BA from Haverford College in 1949 and
also attended Georgetown Foreign Service School. He is a fellow in the American
Institute of Management.
ROSE S. DIOTTAVIO has been President and a Director of the Company since
January 31, 1995 and Treasurer since August 1998, and has served in comparable
positions with present subsidiaries of the Company since 1991.
Ms. DiOttavio has served in a variety of management positions in the health
care industry, including operations troubleshooter, needs assessment, regulatory
compliance, financial feasibility, project development, financial consulting,
operations and fiscal management, expert witness and acquisition due diligence.
Specifically, she has been President of Health Ventures Limited since 1986, and
currently serves as a consultant to Senior Lifestyles, Inc. Formerly, she has
served as President and Chairperson of Neumann Medical Center; Vice President of
Strategic Planning for Neumann Medical Center; Development Consultant for UMS
Communities, Inc.; Director and Executive Vice President of Capital Home Care
Group; Vice President of Planning and Development for Horsham Psychiatric Group;
Vice President of Operations for Medical Management Institute;
Consultant--Strategic Planning for Plante & Moran (CPA/Consulting Firm,
Michigan); Deputy Director for Health Systems Agency of Southeastern
Pennsylvania; Senior Planning Associate for Regional Comprehensive Health
Planning Council, Inc.; and Chairperson, Metropolitan Home Health Services, Inc.
Ms. DiOttavio holds a BS and M.S.H. from the University of Pittsburgh and its
Graduate School of Public Health. She has been noted for distinction in
Outstanding Young Women of America and Who's Who of American Women. She also
serves currently as a Director and Vice Chairperson of Horizon House, a
non-profit organization serving the mentally ill, homeless and disadvantaged.
THOMAS X. FLAHERTY has been a Director of the Company since January 31,
1995 and has also served as Treasurer until August 1998 when he resigned as
Treasurer due to time constraints. Mr. Flaherty has held comparable positions
with certain of the Company's present subsidiaries since 1991. Mr. Flaherty is
the founder, and since March 1990 has served as President, of Value Added
Investment Corporation ("VAIC,") specialized investment banking and financial
consulting organization headquartered in Narberth, Pennsylvania, since March
1990. Prior to forming VAIC, Mr. Flaherty was a tax consultant with the
accounting firms of Arthur Andersen and Company and Coopers and Lybrand.
Previously, Mr. Flaherty was employed as a Financial Analyst and Investment
Consultant by Shearson Lehman Brothers. He has held or currently holds licenses
as a Certified Public Accountant and a registered securities broker and
commodities broker.
Mr. Flaherty is a recognized speaker and member of the National Speakers Bureau.
He has presented and lectured worldwide on various financial, business and
management topics. Outside of his daily responsibilities as President of VAIC,
Mr. Flaherty also serves as a member of the Board of Directors of the following
corporations and other organizations; Durable Medical Equipment Corporation; ITI
Technical Services, Inc.; The Marquis Mortgage Corporation; Park Place Builders,
Inc.; Senior Lifestyles Incorporated; Universal Trade Corporation; Living
Younger Longer, Inc.; M&M Opportunities, Inc.; The Northwestern Corporation; The
Northwestern Properties Company; Northwestern Enterprises, Inc.; The Amica
Company; Allied Health Care, Inc.; and Northwestern Management Services Company.
43
<PAGE>
GEORGE P. STASEN has served as a director and/or advisor to government
units, foundations and public corporations. He has structured and provided
financing and investment guidance to major corporations, investment companies,
developing enterprises and municipalities. Mr. Stasen co-founded Mentor Capital
Partners, Ltd., a prominent Philadelphia based Merchant Banking firm in 1993.
Prior to returning to the Philadelphia area, Mr. Stasen was Chief Operating
Officer from 1987 of the Rushmore Group of Bethesda, Maryland a diversified
financial services firm engaged in the management of mutual funds, institutional
money management, financial advisory services and securities brokerage. From
1984 to 1987, Mr. Stasen was President and Chief Operating Officer of American &
European Investment Corporation, an international financial and investment
advisor headquartered in Washington, D.C. From 1978 to 1984, Mr. Stasen served
Provident Institutional Management Corporation (PIMC) as Vice President
responsible for investment strategy and product development. PIMC the advisory
subsidiary of Provident National Bank of Philadelphia, Pennsylvania (PNC)
provided institutional investment management services principally to banks, at
which time assets under management increased from $50 million to $15 billion.
Mr. Stasen also serves as Chairman of Declaration Holdings a mutual fund
management and administration company as well as a director of several private
Delaware Valley based corporations. Mr. Stasen has been a lecturer on
investment and economic trends throughout the United States and Europe. Mr.
Stasen earned his BS from Drexel University in 1968 with a concentration in
Economics and was subsequently awarded a fellowship and earned an MBA from
Drexel.
CHARLES A. BURTON currently serves as Director of this Company as well as
others, such as Anadigics, Inc., Microsource, Inc., Sherpa Corporation, and
Visual Edge Technologies. From 1984 to the present, Mr. Burton has served as
President and Managing Director of Philadelphia Ventures, Inc. Since 1973, Mr.
Burton has served in several positions, including Vice President of CIGNA
Corporation, President of Venture Capital Corporation, and Chairman of the Board
and Founder of Devon Systems Group, Inc., which was eventually sold to Citicorp
Venture Capital.
Mr. Burton's Professional and Civic Activities have included that of Former
President and Trustee of the Delaware Valley Venture Group, Director of the
Philadelphia Chamber of Commerce and Trustee for Gettysburg College. Mr. Burton
earned his AB from Gettysburg College in 1967 and an MBA from the Wharton
Graduate School, University of Pennsylvania. Mr. Burton also served his country
as a Line Officer in the United States Navy from 1967 to 1972.
OFFICERS OF THE COMPANY:
- ---------------------------
BRAD BARRY joined CoreCare Systems, Inc. in June 1999 as Executive Vice
President CFO. Formerly, he was Senior Vice President and CFO and a founder of
Omnia. Prior to joining Omnia, Mr. Barry was the Vice President of Mergers and
Acquisitions for Vanguard. Mr. Barry has over 20 years of senior health care
financial management experience, having served both as Chief Financial Officer
and Chief Operating Officer for various hospitals ranging in size from 100 to
300 beds. In addition, he has extensive experience in health care data
processing, having been Vice President of Product Development for a major health
care software firm. He is a member of Widener University's adjunct faculty in
their MBA in Health Administration. Mr. Barry received a BS in Commerce and
Engineering Science from Drexel University, his MBA in Accounting and Finance
from Drexel University and his MHA from Widener University. Currently, Mr.
Barry serves as a director on two non-profit health care provider boards and one
for-profit health care company in the medical device industry.
44
<PAGE>
DR. MARK NOVITSKY, M.D. joined Kirkbride Center in August 1998 as Director of
Clinical Improvement and senior psychiatrist and has since been named the
Psychiatrist in Chief at Kirkbride Center and the Corporate Medical Director of
CoreCare Systems, Inc. He was Chief of Psychiatry at Presbyterian Medical
Center and is recognized for his work in geriatric psychiatry. During his ten
years at Presbyterian as Chief, Dr. Novitsky was instrumental in the successful
growth and expansion of the psychiatric department. During that time, he
assisted in the development of a 24-bed acute inpatient psychiatric unit, an
18-bed LTSR, and a 20-bed managed care sub-acute unit. Dr. Novitsky headed the
consultation liaison services and led to the formation of an emergency
psychiatric assessment service in their emergency room. He was also active in
the evolution of day programs and psychiatric care provided at ten local nursing
homes. Dr. Novitsky earned his M.D. from the Bowman Gray School of Medicine of
Wake Forest University in Philadelphia and is Board Certified in Psychiatry.
Dr. Novitsky has gained a reputation of developing excellent relationships with
area community leaders, the Philadelphia Office of Mental Health and payor
representatives such as Community Behavioral Health (CBH).
DR. FRED BAURER, M.D. graduated from Wesleyan University and Temple
University School of Medicine. He completed Residency Training at the Institute
of Pennsylvania Hospital and Psychoanalytic Training at the Philadelphia
Psychoanalytic Institute and the Philadelphia Psychotherapy Training Program.
He is Board Certified in Psychiatry with added qualifications in Addiction
Psychiatry. Dr. Baurer served as Director of the Strecker Partial Hospital
Program from its inception in 1989 until 1997, and a Co-director of Strecker
Hall in 1996-1997. He also has been Director of the OATS Program (Outpatient
Addiction Treatment Service) since 1992. Dr. Baurer is the Regional Chairperson
of the America Academy of Addiction Psychiatry. Since the inception of the
Kirkbride Center in February 1997, Dr. Baurer has served as Medical Director of
Substance Abuse Services, and he has also been appointed Assistant Medical
Director.
KEITH DAY, MBA joined the Company as Senior Vice President in July of 1998 and
became Corporate Secretary in December 1998. Mr. Day is responsible for the
development of Quantum Clinical Services Group, the Company's clinical research
subsidiary. Prior to joining the Company, Mr. Day had been acting as an
independent consultant in the clinical research field. From 1993 to 1997 he was
Director of Finance for Airgas, Inc. in Radnor, PA where he was responsible for
investigating, negotiating and structuring corporate development opportunities.
From 1989 to 1992 he was a Project Manager for Hines Interests Limited
Partnerships in Philadelphia, PA. From 1984 to 1989 he was Chief Financial
Officer and Principal of Conklin Construction Corporation of Greenwich, CT.
From 1982 to 1984 he was a Senior Financial Analyst for Pepsico, Inc. in NY.
From 1979 to 1981 he was a Financial Management Associate for GTE Corporation in
Stamford, CT. Mr. Day received his BS in Economics in 1979 from the University
of Pennsylvania, Wharton School, and his MBA from Dartmouth College, Amos Tuck
School of Business in 1983.
45
<PAGE>
JOHN SCHROGIE, M.D. has been acting as the Senior Vice President for
Clinical Research since July of 1998 and is responsible for the development of
the Company's clinical research subsidiary, Quantum Clinical Services Group.
Dr. Schrogie is trained in internal medicine and completed a fellowship in
clinical pharmacology at John Hopkins University. He received in BS from Boston
College in 1956 and his M.D. from Yale University School of Medicine in 1960.
During his career he has served in various positions at the FDA, NIH, Schering
Plough and Merck Research Institute. He founded one of the first contract
research organizations, the Philadelphia Association for Clinical Trials (PACT)
and served as Chairman, President and CEO. After the company was acquired by
Corning, Inc. (now Covance), he continued to serve as an executive. He most
recently acted as Assistant Director of health Policy and Clinical Outcomes at
Jefferson Medical College, and prior to that was Chairman and CEO of Pulse Data
Institute, a start-up medical services company in Bryn Mawr, PA. He is
currently the Secretary-Treasurer of the American Society for Clinical
Pharmacology and Therapeutics.
46
<PAGE>
JOHN FLEMING Vice President Development is responsible for the development
For the Kirkbride Center. John negotiated and administers all third party tenant
contracts, supervises tenant fit-out, budgets, monitors and manages the facility
and property, assists in securing, negotiating, and executing all CoreCare Real
Estate related financing. From 1991 through to 1995 John was Managing Director
of the Chestnut Hill Health and Fitness Center. He was responsible for the
operations of the facility, including all budgeting, managing marketing and
strategic planning of the Fitness center. From 1984 through to 1990 John was
Project Manager for St. James Properties and Real Estate sales in Boston; he
also supervised and managed the renovation and leasing of small to medium size
commercial office buildings in downtown Boston.
DR. ELLA M. BOWEN, ED.D. currently serves as the Vice President of
Community Relations and Public Affairs for CoreCare Systems, Inc. Prior to
CoreCare, Dr. Bowen served as the Director/Vice President of Community Relations
for Oak Tree/Oxford Health Plans. She also served in several capacities in city
government and in education. Her job experiences include serving as the Senior
Assistant Managing Director in Mayor Rendell's administration, Youth Services
Commissioner for Mayor Goode's administration, Legislative Assistant for
Councilwoman Augusta Clark, assistant professor and assistant Dean of
Instruction for the School in New Jersey and OLC in Illinois. Dr. Bowen has
also worked as an Affirmative Action Consultant in Business and Industry.
Dr. Bowen received her Master's Degree and Doctorate of Education from the
University of Illinois. She received her Undergraduate Degree in Business from
the University of Maryland, Eastern Shore. She is currently an adjunct
professor in Education at Rowan University and hosts a monthly radio program
called "Mind, Body and Soul" on WHAT Radio. Her other activities include
serving on such boards as Special Olympics, Big Brother/Big Sister, PAL, PUSH,
Mayor's Coordinating Office for Drug & Alcohol Programs, Philadelphia Fight,
Black Family Reunion Center and the National Forum and Black Public
Administrators. She has published several books and articles and is well known
as a dynamic motivational speaker both locally and nationally.
MEG GIVNISH-MERCER is Vice President for Education and Training, CoreCare
Systems, Inc. She is also a member of the faculty for the Graduate School of
Health and Education at St. Joseph's University. From 1974 until 1985, Ms.
Givnish-Mercer was a key member of the management team that purchased and
developed the Horsham Clinic. She worked as both a clinical leader and an
administrative liaison during those years. Ms. Givnish-Mercer holds degrees
from Chestnut Hill College, Beaver College and Summit University. She has been
a member of Who's Who of American Women since 1985 and was awarded a television
Emmy for her writing, directing and narrating the one time special "What Will We
Do About Momma?," a thought provoking dramatic attempt to care for elderly
parents.
She is certified as a Trainer and Practitioner by the American Board of
Examiners in Psychodrama, group Psychotherapy and Sociometry. In this capacity,
she has trained hundreds of clinicians throughout the United States. She is
also well known for her energizing presentations, management-training seminars
as well as for her clinical seminars for Psychotherapists, teachers and other
members of the helping professions. Ms. Givnish-Mercer joined the Company in
1992 as a senior manager/clinician of Lakewood Retreat, Inc.
47
<PAGE>
DANIEL B. LOPRETO, PH.D., Vice President of Care Systems Management came to
CoreCare Systems, Inc. after directing the Care Management Department at Green
Spring of Eastern Pennsylvania, the third largest managed behavioral health
company in the country. Dr. LoPreto directed a department of over thirty
psychiatrists and mental health professionals who were responsible for managing
the mental health and substance abuse services to approximately 3 million
covered lives in Pennsylvania, New Jersey and Delaware. Originally recruited to
the position of CoreCare's Director of Adult Continuum, he assumed his current
position upon CoreCare's acquisition of Kirkbride Center. He has worked within
private psychiatric hospitals, outpatient clinics and managed care as both a
clinician and administrator for 15 years.
Dr. LoPreto is licensed as a Psychologist in both Pennsylvania and New
Jersey and is board-certified in the specialty area of applied psychophysiology.
He is a Diplomat of the American Board of Quality Assurance and Utilization
Review Physicians and is a Diplomat of the American College of Forensic
Examiners, Board of Examiners, Board of Psychological Specialties. Dr. LoPreto
provides peer reviews as well as independent medical examinations and disability
evaluations for numerous insurance companies in both Pennsylvania and New
Jersey. He is one of only two psychologists chosen and approved to participate
in Southeastern Pennsylvania Transit Authority's panel of professional providers
of service to SEPTA employees.
ALBERT CAMPANA, MBA is the Vice President / Senior Director of Administrative
Services at the Kirkbride Center. He was born and raised in Philadelphia and
received his BS Degree in Psychology from Penn State University. He began his
career in behavioral health at the Horsham Clinic where he worked his way up
from mental Health Technician to Clinical Coordinator and Chief Social Worker.
In 1989, he received his MBA from Temple University. His last positions, before
joining Corecare Systems, Inc., were with Graduate Health Systems at Mt. Sinai
Hospital as their Senior Director for Psychiatry and with Allegheny University
Hospitals, Parkview as Director of Behavioral Health.
ITEM 10 - EXECUTIVE COMPENSATION
(A) GENERAL:
--------
For the fiscal years ended December 31, 1996 and 1997 neither of the
Company's Chief Executive Officer or President received any compensation from
the Company. In order to reflect a fair estimate of the cost of services
provided by the Company's Chairman of the Board, Thomas T. Fleming, and
President, Rose S. DiOttavio, in this period, the Company charged operations
with $144,000 in 1997, or $72,000 for each, which was accrued and credited a
like amount to paid in capital. Mr. Fleming and Ms. DiOttavio have each
received annual salaries of $156,000 commencing March 1998, and paid currently,
which salaries the company believes are below industry standards.
(B) SUMMARY COMPENSATION TABLE:
-----------------------------
The following summary compensation table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Company's Chief Executive Officer and the next four most highly
compensated executive officers during the year ended December 31, 1998.
48
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
1998 ANNUAL COMPENSATION
Securities
----------
Restricted Underlying
All Other Annual ---------- ----------
Name and Principal Position Salary Bonus ($) Compensation Stock Options
- ---------------------------------------- -------- --------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Thomas Fleming, Chairman $120,000 -0- 6,758 -0- -0-
Of the Board and Chief Executive Officer car allowance
Rose S. DiOttavio, President $120,000 -0- -0- -0- -0-
Richard C. Beatty 107,466 -0- -0- -0- -0-
David Baron 250,542 -0- -0- -0- -0-
- ---------------------------------------- -------- --------- ---------------- ---------- ----------
<FN>
1) Refer to General Information above.
</TABLE>
THE COMPANY HAS NOT PRESENTED COMPENSATION FOR 1997 IN THE TABLE AS MR. FLEMING
AND MS. DIOTTAVIO DID NOT RECEIVE COMPENSATION IN 1997 AND NO OTHER OFFICER OF
THE COMPANY RECEIVED COMPENSATION IN EXCESS OF $100,000 IN 1997.
(C) OPTIONS/SAR GRANTS:
--------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ------------------ ------------- --------------- ---------- -----------
Year ended 1998
- ------------------
Number of %Total
Securities Options/SARS Exercise
Underlying Granted to or Base
Options/SARS Employees Price Expiration
Name Granted in Fiscal Year ($/Sh) Date
- ------------------ ------------- --------------- ---------- -----------
<S> <C> <C> <C> <C>
Thomas T. Fleming -0- -0-
- ------------------ ------------- --------------- ---------- -----------
Rose S. DiOttavio -0- -0-
- ------------------ ------------- --------------- ---------- -----------
David Baron 100,000 23% $ 1.25/sh 7/15/02
- ------------------ ------------- --------------- ---------- -----------
Richard C. Beatty 40,000 9% $ 1.50/sh 12/31/98
- ------------------ ------------- --------------- ---------- -----------
</TABLE>
(D) AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE:
------------------------------------------------------------------------
During the fiscal year ended December 31, 1998, no executive officer of the
Company exercised any options.
(E) LONG-TERM INCENTIVE PLANS: None.
----------------------------
(F) COMPENSATION OF DIRECTORS:
----------------------------
During the fiscal year ended December 31, 1998, no director of the Company
received any compensation for any services provided in such capacity. Directors
of the Company are reimbursed for expenses incurred by them in connection with
their activities on behalf of the Company.
49
<PAGE>
(G) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
------------------------------------------------------------------------
ARRANGEMENTS:
- -------------
The Company and/or its subsidiaries have no employment agreements with any
of its executive officers.
(H) REPORT ON REPRICING OF OPTIONS/SARS: Not Applicable.
----------------------------------------
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1998, with
-----------------
respect to the beneficial ownership of CRCS' securities by officers and
directors, individually and as a group, and all holders of more than five (5)
percent of the shares of any class of CRCS voting securities. Unless otherwise
indicated, all shares are beneficially owned and sole investment and voting
power is held by the beneficial owners indicated.
<TABLE>
<CAPTION>
PRINCIPAL SHAREHOLDERS
NUMBER OF SHARES BENEFICIALLY OWNED 1
NAME AND
ADDRESS OF
BENEFICIAL COMMON SERIES A SERIES E SERIES F
OWNER STOCK2 PREFERRED PREFERRED3 PREFERRED4
----------
<S> <C> <C> <C> <C>
Officers and
Directors:
- -----------------
Thomas T. 1,673,470 3,000 1,270.6
Fleming5 (10.5%)
Rose S. 1,687,500 3,000 350
DiOttavio6 (10.6%)
Thomas X. 405,000
Flaherty7 (*)
David Baron 8 101,000
(*)
----------------
Richard Beatty 9 66,000
(*)
----------------
John Fleming 10 56,000
(*)
----------------
Ella M. Bowen 500
(*)
----------------
Daniel LoPreto 10,600
(*)
----------------
Meg Givnish- 68,990
Mercer 11 (*)
- ----------------- ----------------
50
<PAGE>
Roberta 15,500
Mainiero 12 (*)
- ----------------- ----------------
4,262,200
Total Officers (24.7%) 6,000 1,620.6
and Directors:
- -----------------
(b) Other
Beneficial
Owners:
- -----------------
Phila. 1,327,956 (8.3%)
Ventures, 11,
L.P.13
Phila.
Ventures-Japan
1, L.P.
Phila.
Ventures-Japan,
11-L.P.
200 S. Broad
Street 8th Floor
Philadelphia,
Pa. 19102
- -----------------
Total Other 1,327,956
Beneficial (8.3%)
Owner
<FN>
(*) less than 5%
</TABLE>
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date as to which this
information is provided. In computing the number of shares and the
percentage of outstanding shares of each class of securities held by each
person or group of persons above, any security which such person or persons
has or have a right to acquire within 60 days from the date of this
Memorandum is deemed outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) In computing the number of shares and the percentage of outstanding Common
Stock "beneficially owned" by a person who owns any shares of any series of
Convertible Preferred Stock, the shares issuable upon exercise of such
rights to acquire Common Stock owned by such persons, but no other person,
are deemed to be outstanding.
(3) Series E Convertible Preferred Stock is convertible into Common Stock on
the basis of 100 share of Common Stock per share of Series E Convertible
Preferred Stock.
(4) Series F Convertible Preferred Stock is convertible into Common Stock on
the basis of 50 shares of Common Stock per share of Series F Convertible
Preferred Stock.
(5) Does not include 140,186 shares of Common Stock by Health Ventures Limited,
a consulting firm in which Mr. Fleming is a principal, is a stockholder of
Chestnut Hill Fitness Club. Includes 63,530 shares of Common Stock issuable
upon conversion of 1,270.6 shares of Series F Preferred
(6) Does not include 140,186 shares of Common Stock owned by Health Ventures
Limited, a consulting firm in which Ms. DiOttavio is a principal, is a
stockholder of Chestnut Hill Fitness Club, Inc. Includes 17,500 shares of
Common Stock issuable upon conversion of 350 shares of Series F Preferred.
(7) Does not include 67,102 shares of Common Stock owned by Josephine Flaherty,
the mother of Thomas X. Flaherty, and a member of the Company's Board of
Directors.
51
<PAGE>
(8) Includes an option to acquire 100,000 shares at $1.25 per shares granted to
Dr. Baron when he joined the Company pursuant to the Company's 1996 Stock
Plan.
(9) Includes options to acquire 40,000 shares of Common Stock at $1.50 per
share granted to Mr. Beatty when he joined the Company pursuant to the
Company's 1996 Stock Plan.
(10) Includes an option to acquire 15,000 shares of Common Stock at $0.10 per
share pursuant to the Company's 1996 Stock Plan.
(11) Includes an option to acquire 150,000 shares of Common Stock at $0.10 per
share pursuant to the Company's 1996 Stock Plan.
(12) Includes an option to acquire 15,000 shares of Common Stock at $1.50 per
shares pursuant to the Company's 1996 Stock Plan.
(13) Common Shares held by each Philadelphia Venture Fund are as follows:
Philadelphia Ventures II L.P. 1,033,360
Philadelphia Ventures Japan I L.P. 147,298
Philadelphia Ventures Japan II L.P. 147,298
--------------------------------------- ---------
For a Total of: 1,327,956
Charles A. Burton is the Director of the Company, and General Partner in
each of the above Philadelphia Venture Funds.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company believes that the terms of the transactions described below
were as favorable to the Company as would have been obtained by the Company in
arms-length negotiation with non-affiliated entities.
From time to time Thomas Fleming and Rose DiOttavio have made advances to
the Company. A substantial portion of these advances consisted of funds from
bank financings obtained by Mr. Fleming and Ms. DiOttavio personally, which they
then lent to the Company upon the same terms, which they had obtained from the
banks. As of December 31, 1998, Mr. Fleming and Ms. DiOttavio advanced
$1,013,428 to the Company of which $386,080 for funds, which they had borrowed
from banks and loaned to the Company.
PERSONAL GUARANTEES BY PRINCIPAL STOCKHOLDERS
- -------------------------------------------------
The Company's subsidiaries have approximately $3,300,000 in lines of credit
and term loans which either are loans made directly to the Company or its
subsidiaries which are secured by personal guarantees and collateral of Thomas
Fleming, Rose DiOttavio, and in some cases, other members of the Fleming family.
52
<PAGE>
FRANKLIN DEVELOPMENT COMPANY
- ------------------------------
In October 1996, the Company entered into a Development Management
Agreement with Franklin Development Company, LLC. ("Franklin"). Mr. Christopher
Fleming, the son of Thomas T. Fleming, the Chairman of the Company, is a senior
officer of Federal. The Company and Franklin have agreed to terminate this
contract effective February 1998, except for certain performance fees with
respect to the refinancing of the Kirkbride Center and commissions earned for
leases concluded. The terms and conditions relative to the termination of this
agreement are still being negotiated as of the date of this registration
statement. Since the effective date of the contract, the company has paid
Franklin approximately $227,000 in cash and stock for development and
performance fees.
CONVERSION OF SERIES B CONVERTIBLE PREFERRED STOCK
- --------------------------------------------------------
On June 30, 1996, the six Series B Convertible Preferred stockholders,
including Mr. Fleming, converted their preferred shares and accrued dividends
into Common Stock. The conversion ratio is 92 shares of Common Stock per share
of Series B Convertible Preferred Stock. The aggregate number of common shares
issued was 725,903. The conversion also included accrued and unpaid interest on
the CoreCare Notes totaling $124,582.21 at $1.00 per share.
The company issued a total 725,902 of common stock for the conversion of
6,546.7 shares of Preferred Series B stock into 601,320 shares of common stock
and 124,582 shares of common stock for accredited unpaid interest of $124,582.
See Item 4 "Recent Sales of Unregistered Securities" for descriptions of
certain transactions involving acquisitions by the Company.
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.001 par value per share, of which 15,949,128 shares are
outstanding as of December 31, 1998, and 5,000,000 shares of Preferred Stock, as
to which the Board of Directors has the power to designate the rights, terms,
preferences, etc. Of the initially undesignated Preferred Stock 10,000 shares
have been designated as Series A Preferred Stock; 25,000 shares have been
designated Series C Convertible Preferred Stock; 15,000 shares have been
designated as Series D Preferred Stock; 13,250 shares have been designated as
Series E Convertible Preferred Stock; and 6,000 shares have been designated as
Series F Convertible Preferred Stock.
COMMON STOCK
- -------------
The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
par value per share. As of December 31, 1998, 15,949,128 shares were issued and
outstanding. Holders of Common Stock are entitled to one vote for each share of
Common Stock owned of record on all matters to be voted on by stockholders,
including the election of directors. The holders of Common Stock are entitled
to receive such dividends, if any, as may be declared from time to time by the
Board of Directors, in its discretion, from funds legally available therefor.
The rights of holders of Common Stock to receive dividends are subject to
the dividend rights of the holders of Preferred Stock, as described below.
Similarly, the rights of holders of Common Stock, upon liquidation or
dissolution of the Company, are subject to the preferences afforded to holders
of the Company's Preferred Stock.
53
<PAGE>
The Common Stock has no preemptive or other subscription rights, no
cumulative voting rights, and there are no conversion rights or redemption
provisions. All outstanding shares of Common Stock are validly issued, fully
paid, and nonassessable.
PREFERRED STOCK
- ----------------
Holders of Preferred Stock vote as a class with holders of Common Stock,
except that without the vote or consent of the holder of at least 67% of the
respective Preferred Stock then outstanding, the Company may not (i) create or
issue any class or series of capital stock ranking, either as to payment of
dividends, distribution of assets or redemptions, prior to the Preferred Stock,
(ii) alter or change the designations, powers, preferences, or rights, or the
qualifications, limitations or restrictions of the Preferred Stock.
Holders of Series B, C, D, E, and F Preferred Stock are entitled to vote in
the election of directors and on all other matters submitted to stockholders for
their approval or consent. None of the Preferred Stock has any cumulative voting
rights. The number of votes is equal to the number of shares of Common Stock
into which their Preferred Stock is convertible at the time of the meeting at
which the vote is cast or, in the case of an action of stockholders taken
without a formal meeting, on the date of such action, except that each Preferred
A and D shares, which have no conversion rights, are entitled to 65 and 50
votes, respectively, per share.
SERIES A PREFERRED STOCK
- ---------------------------
The Company has authorized 10,000 shares of Series A Preferred Stock, $.001
par value per share, of which 6,000 shares are issued and outstanding as of the
date of this Registration Statement. The Company's Series A Preferred Stock has
a liquidation value of $100.00 per share ($600,000 in the aggregate) in
liquidation of the Company; a preference over Common Stock to the extent of its
liquidation value; and is entitled to annual dividends in the amount of $4.00
per share (i.e., an annual rate of four (4%) percent) payable semi-annually in
arrears unless and until a "Dividend Reset Event" occurs. After a Dividend
Reset Event, the annual dividend rate on Series A Preferred will be increased
from four (4%) percent to a rate equal to the "prime rate" as published in the
Wall Street Journal as of the last business day preceding the Dividend Reset
- ---------------------
Event plus six (6%) percent. The Series A Preferred is redeemable by the
Company, at liquidation value, in whole or in part, at any time after a Dividend
Reset Event, upon not less than thirty (30) days written notice.
The term "Dividend Reset Event" is defined to mean either (a) a public
offering of equity securities by the Company or any corporation which owns 50%
or more of all classes of the Company's common stock then outstanding
(hereinafter, a "Parent of the Company") which results in the Company's receipt
(or receipt by the Parent of the Company) of not less than $5,000,000 net of
offering underwriting discounts and commissions, or (b) either the Company
and/or the Parent of the Company, on a consolidated basis, having as of any
fiscal year-end stockholders' equity of $12,000,000 or more.
The Company has the right to redeem the Series A Preferred Stock after the
Dividend Reset Date and upon not less than 30 days notice at $100.00 per share
plus accrued dividends.
54
<PAGE>
SERIES B CONVERTIBLE PREFERRED STOCK
- ----------------------------------------
The Company has authorized 7,000 shares of Series B Convertible Preferred
Stock. All previously outstanding shares of Series B Preferred were converted
on June 30, 1996, and as of the date of this Registration Statement, there were
no shares of Series B Preferred outstanding.
Holders of Series B Preferred are entitled to receive annual dividends
equal to the dividends payable on Series A Preferred Stock, and to convert
shares of Series B Preferred into Common Stock on the basis of 92 shares of
Common Stock per share of Series B Preferred Stock. Conversion prices/ratios
will be adjusted in the event of any stock splits, dividends on Common Stock
payable in Common Stock or similar events. Series B Preferred Stock has a
liquidation value of $100.00 per share in liquidation of the Company.
The Company has the right to redeem the Series B Shares at $100 per share
plus accrued dividends upon not less than thirty-(30) days written notice.
Of the Series B Convertible Stock issued to Thomas T. Fleming, 88,044.40
shares where converted to 725,903 shares of common stock effective August 8,
1996.
SERIES C CONVERTIBLE PREFERRED STOCK
- ----------------------------------------
The Company has authorized 25,000 shares of Series C Convertible Preferred
Stock, of which 8,147.3 shares are issued and outstanding as of the date of this
Registration Statement. Holders of shares of Series C Convertible Preferred
Stock (the "Series C Preferred") are entitled to annual dividends of $6.00 per
share, payable semi-annually.
Each share of Series C Preferred are convertible at the option of its
holder into 66.67 shares of Common Stock. Conversion prices/ratios will be
adjusted in the event of any stock splits, dividends on Common Stock payable in
Common Stock or similar events. Series C Preferred Stock has a liquidation
value of $100.00 per share plus in liquidation of the Company; and is superior
in rank to all other stock of the Company except for Preferred Series E which
shares the same rank.
The Company has the right to redeem the Series C Shares at $100 per share
plus accrued dividends upon not less than thirty (30) days written notice.
SERIES D PREFERRED STOCK
- ---------------------------
The Company's Board of Directors has designated 15,000 shares of its
Preferred Stock as Series D Preferred Stock, of which no shares are issued and
outstanding as of the date of this Registration Statement. Holders of shares of
Series D Preferred Stock (the "Series D Preferred") will be entitled to annual
dividends of $6.00 per share, payable semi-annually. Series D Preferred Stock
has a liquidation value of $100.00 per share in liquidation of the Company and
is equal in rank to the Series A Preferred.
The Company has the right to redeem the Series D Shares at $100.00 per
share plus accrued dividends upon not less than thirty (30) days written notice.
55
<PAGE>
SERIES E CONVERTIBLE PREFERRED STOCK
- ----------------------------------------
The Company's Board of Directors has designated 13,250 shares of its
Preferred Stock as Series E Preferred Stock, of which there are no shares
issued, and outstanding as of the date of this Registration Statement. Holders
of shares of Series E Preferred Stock (the "Series E Preferred") are entitled to
annual dividends of $6.00 per share payable semi-annually.
Prior to the Series E Redemption Date, each share of Series E Preferred are
convertible at the option of its holder into 100 shares of Common Stock.
Conversion prices/ratios will be adjusted in the event of any stock splits,
dividends on Common Stock payable in Common Stock or similar events. Series E
Preferred Stock has a liquidation value of $100.00 per share in liquidation of
the Company, and is superior in rank to all stock of the Company except for
Series C that shares the same rank.
After October 26, 2000, the Company has the right to redeem the Series E
Shares upon not less than 30 days written notice at $100.00 per share plus
accrued dividends. On or after October 26, 2005, holders of Series E Shares
have the right to require the Company to redeem shares not previously converted
or redeemed.
On December 30, 1998 the Company received written notice from Philadelphia
Ventures and its affiliated investment funds to convert the 9,933.72 outstanding
shares of Series E Preferred Stock into 1,192,0446 shares of Free Trading Common
Stock.
SERIES F CONVERTIBLE PREFERRED STOCK
- ----------------------------------------
The Company's Board of Directors has designated 6,000 shares of its
Preferred Stock as Series F Convertible Preferred Stock, of which 2,870.6 shares
are issued and outstanding as of the date of this Registration Statement.
Holders of shares of Series F Convertible Preferred Stock (the "Series F
Preferred") are entitled to annual dividends of $6.00 per share, payable
semi-annually.
Each share of Series F Preferred are convertible at the option of its
holder into 50.00 shares of Common Stock. Conversion prices/ratios will be
adjusted in the event of any stock splits, dividends on Common Stock payable in
Common Stock or similar events. Series F Preferred has a liquidation value of
$100.00 per share in liquidation of the Company, and is equal in rank to Series
A Preferred.
The Company has the right to redeem the Series F Shares upon not less than
thirty (30) days written notice at $100.00 per share plus accrued dividends.
UNDESIGNATED PREFERRED STOCK
- ------------------------------
The Company's Board of Directors presently has the authority by resolution
to issue up to 4,923,750 shares of preferred stock in one or more series and fix
the number of shares constituting any such series, the voting powers,
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations, or restrictions thereof, including the
dividend rights, dividend rate, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the stockholders. For example, the Board of Directors is authorized
to issue a series of preferred stock that would have the right to vote,
separately or with any other series of preferred stock, on any proposed
amendment to the Company's Articles of Incorporation or any other proposed
corporate action, including business combinations and other transactions.
56
<PAGE>
OUTSTANDING WARRANTS/OPTIONS
- -----------------------------
Prior to the date of this Registration Statement, the Company had issued
the following outstanding Warrants or Options to purchase Common Stock:
A. Series WC and WD Warrants issued from December 1, 1995 to February 16,
1996 exercisable for a total of 581,716 shares at an exercise price of
$1.125 per share with an expiration date of December 31, 1996,
extended by amendment to April 1, 2002 (provided that the expiration
date will be extended until such time as the Company shall have
processed a registration statement covering the warrant shares and
such registration statement shall have been effective for 90 days)
B. Warrant issued October 1, 1995 exercisable for 50,000 shares at an
exercise price of $2.00 per share with an expiration date of October
17, 1997 (provided that the expiration date shall be extended until
such time as the Company has processed a registration statement
covering the warrant shares and such registration statement has been
effective for 90 days)
C. Warrant issued October 1995 exercisable for a number of shares equal
to 10% of the Common Stock outstanding on the date of exercise. In
determining the number of shares outstanding, all securities
convertible into common stock are deemed converted; with an exercise
price of $2.00 per share with escalation provisions of $.50 per share
on October 18, 1997, and each October 18 thereafter, to a maximum of
$3.50 per share. The expiration date is October 17, 2000 (provided
that the expiration date shall be extended indefinitely until the
Company has processed a registration statement covering the warrant
shares and such registration statement has been in effect for 90 days)
D. Warrants issued between June 10, 1996 and August 2, 1996 exercisable
for a total of 658,333 shares at exercise prices ranging from $1.00 to
$1.50 per share with expiration dates of June 10, 2001 to August 2,
2001
E. Warrants issued October 1, 1996 exercisable for 4,000 shares at an
exercise price of $2.50 per share with an expiration date of October
31, 2001
F. Series E Warrants issued October 4, 1996 exercisable for a total of
433,899 shares at an exercise price of $3.00 per share with expiration
dates of October 4, 2002 (See "Part II, Item 4, Recent Sales of
Unregistered Securities)
G. GL Warrants issued December 20, 1996 exercisable for a total of
126,567 shares at an exercise price of $1.50 per share with an
expiration date of December 1, 2002 (provided that the expiration date
will be extended until such time as the Company shall have processed a
registration statement covering the warrant shares and such
registration statement shall have been effective for 180 days) (See
"Part II, Item 4, Recent Sales of Unregistered Securities)
57
<PAGE>
H. Series IAF Warrants issued February 14, 1997 exercisable for a total
of 95,000 shares at an exercise price of $1.50 per share with an
expiration date of January 31, 2002 (provided that the expiration date
will be extended until such time as the Company shall have processed a
registration statement covering the warrant shares and such
registration statement shall have been effective for 180 days) (See
"Part II, Item 4, Recent Sales of Unregistered Securities)
I. Warrants issued between March 5, 1997 to December 19, 1997 exercisable
for a total of 82,500 shares at exercise prices ranging from $.80 to
$1.50 per share with expiration dates of December 31, 2000 to December
31, 2004
J. Warrant authorized to be issued May 30, 1997, issued July 10, 1998
exercisable for 50,000 shares at an exercise price of $2.00 per share
with an expiration date May 30, 2001
K. Options issued between November 26, 1997 and January 30, 1998
exercisable for a total of 430,553 shares at an exercise price of $.90
per share with expiration dates of November 25, 2002 to January 30,
2003 (See "Part II, Item 4, Recent Sales of Unregistered Securities)
L. Options issued between November 26, 1997 and January 30, 1998
exercisable for a total of 430,552 shares at an exercise price of $.90
per share with expiration dates of November 26, 2002 to January 30,
2003 (See "Part II, Item 4, Recent Sales of Unregistered Securities)
M. Warrants issued June 24, 1998 and July 24, 1998 each exercisable for
25,000 shares at an exercise price of $1.00 per share with an
expiration date of June 30, 2002 (See "Part II, Item 4, Recent Sales
of Unregistered Securities)
A number of the Warrants described above contain antidilution provisions
that are triggered by events such as, among others, the issuance by the Company
of shares at a purchase price less than the stated exercise price of the
Warrants. The triggering events have been recognized, appropriate calculations
have been made on the Company's books, and the overall impact on the number of
shares issuable and the purchase price therefor is immaterial.
1996 EMPLOYEE STOCK PLAN
- ---------------------------
On July 8, 1996, the Company adopted an employee stock plan pursuant to
which 800,000 shares of the Company's authorized but unissued shares of Common
Stock were reserved for issuance in connection with grants of stock to and the
exercise of options by employees under such plan. Since the adoption of the plan
through July 1998, 237,000 shares of stock have been granted and options for
560,000 shares have been granted and are outstanding of which options to acquire
no shares have been exercised.
At the October 29, 1998 Meeting of Shareholders, the Shareholders approved
reserving 2,000,000 additional shares in connection with grants of stock to and
the exercise of options by employees made under such plan.
58
<PAGE>
TRANSFER AGENT
- ---------------
The Company's transfer agent is StockTrans, Inc., 7 East Lancaster Avenue,
Ardmore, PA 19003-2318.
ANTI-TAKEOVER PROVISIONS
- -------------------------
Although the Board of Directors is not presently aware of any takeover
attempts, the Certificate of Incorporation and Bylaws of the Company and Nevada
law contain certain provisions which may be deemed to be "anti-takeover" in
nature in that such provisions may deter, discourage or make more difficult the
assumption of control of the Company by another corporation or person through a
tender offer, merger, proxy contest or similar transaction or series of
transactions.
Authorized but Unissued Shares: The authorized capital stock of the
---------------------------------
Company includes 50,000,000 shares of Common Stock and 5,000,000 shares of
-
Preferred Stock. These shares of capital stock were authorized for the purpose
of providing the Board of Directors of the Company with as much flexibility as
possible to issue additional shares for proper corporate purposes, including
equity financing, acquisitions, stock dividends, stock splits, employee stock
option plans, and other similar purposes which could include public offerings or
private placements. Shares of Preferred Stock could be issued quickly with
terms calculated to delay or prevent a change in control of the Company without
any further action by the stockholders.
No Cumulative Voting: Neither the Company's Articles of Incorporation nor
---------------------
its Bylaws contain provisions for cumulative voting. Cumulative voting entitles
each stockholder to as many votes as equal the number of shares owned by him
multiplied by the number of directors to be elected. With cumulative voting, a
stockholder may cast all these votes for one candidate or distribute them among
any two or more candidates. Thus, cumulative voting for the election of
directors allows a stockholder or group of stockholders who hold less than 50%
of the outstanding shares voting to elect one or more members of a board of
directors. Without cumulative voting for the election of directors, the vote of
holders of a plurality of the shares voting is required to elect any member of a
board of directors and would be sufficient to elect all the members of the board
being elected.
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) A list of financial statements and financial statement schedule filed as
part of this report is set forth on page 56 hereof. The only Exhibit filed
with this report is Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
did not file any Current Reports on Form 8-K.
(c) Exhibit 27
Financial Information in SEC format (see page 54)
(d) Accountant's Consent (see page 55)
59
<PAGE>
ACCOUNTANT'S CONSENT
To the Stockholders and Board of Directors
CoreCare Systems, Inc.
We consent to the use of our Independent Auditor's Report dated March 9, 1999,
and accompanying financial statements of CoreCare Systems, Inc. (the "Company")
for the years ended December 31, 1998 and 1997, in the Company's Annual Report
on Form 10K-SB for the year ended December 31, 1998, filed with the Securities
and Exchange Commission.
SCHIFFMAN HUGHES BROWN
Certified Public Accountants
Blue Bell, Pennsylvania
October 6, 1999
60
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
PAGE
<S> <C>
Independent Auditor's Report 58
Consolidated Balance Sheets 59-60
Consolidated Statements of Operations 61
Consolidated Statements of Changes in
Shareholders' Equity 62
Consolidated Statements of Cash Flows 63
Notes to Consolidated Financial Statements 64-90
</TABLE>
61
<PAGE>
CORECARE SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
CoreCare Systems, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of CoreCare
Systems, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, changes in shareholders' deficiency, and cash flows
for each of the years in the three year period ended December 31, 1998 (1997
Restated - see Notes 1 and 17). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of CoreCare Systems, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 16 to the financial statements, certain errors resulting in
overstatement of previously reported accounts receivables and understatement of
liabilities as of December 31,1998 were discovered by management of the Company
during the current year. The financial statements have been restated to reflect
the corrections.
SCHIFFMAN HUGHES BROWN
Blue Bell, Pennsylvania
March 9, 1999, except for Note 16, as to which the date is August 17, 1999
2
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
As Restated As Restated
See Note 16 See Note 17
<S> <C> <C>
Current assets:
Cash $ 115,242 $ 304,267
Accounts receivable, net 4,411,418 2,575,473
Prepaid and other current assets 175,659 212,367
----------- -----------
Total current assets 4,702,319 3,092,107
----------- -----------
Contract rights, net of accumulated
amortization of $1,023,619 in 1998
and $531,011 in 1997 265,300 548,663
----------- -----------
Real estate and other assets held for sale 1,100,000 1,513,723
----------- -----------
Property, plant and equipment net 14,151,787 10,727,385
----------- -----------
Other assets:
Goodwill, net of accumulated amortization
of $496,924 in 1998 and 257,598 in 1997 1,705,231 1,801,155
Deferred finance costs, net of accumulated
amortization of $1,759,635 in 1998 and
$241,648 in 1997 443,172 305,354
Security deposits 10,467 108,468
Restricted cash 207,041 197,394
Other 609,610 247,232
----------- -----------
2,975,521 2,659,603
----------- -----------
$23,194,927 $18,541,481
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
1998 1997
------------- -------------
As Restated As Restated
See Note 16 See Note 17
<S> <C> <C>
Current liabilities:
Line of credit $ 4,308,703 $ 1,582,240
Current portion of:
Long-term debt 16,191,983 10,203,425
Lease termination fee payable 38,565 38,565
Obligations under capital lease 71,763
Accounts payable 3,748,882 2,275,442
Advances, officers-shareholders 1,332,692 1,013,428
Accrued expenses 1,851,026 2,091,675
Payroll and payroll taxes payable 3,048,183 1,688,105
Due to Medicare 1,692,389
-------------
Total current liabilities 32,212,423 18,964,643
------------- -------------
Long term liabilities:
Notes payable 2,098,907 2,192,798
Lease termination fee payable 93,467 93,467
------------- -------------
2,192,374 2,286,265
------------- -------------
Commitments and contingencies
Company obligated mandatorily redeemable
Series E convertible preferred stock
(redemption value $943,400 in 1997) 0 1,293,271
------------- -------------
Shareholders' deficiency:
Preferred stock 17 26
Common stock 15,949 12,694
Additional paid in capital 11,086,340 9,357,714
Accumulated deficit (22,312,176) (13,373,132)
------------- -------------
(11,209,870) (4,002,698)
------------- -------------
$ 23,194,927 $ 18,541,481
============= =============
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------------- ------------ -----------------------
As Restated As Restated
See Note 16 See Note 17
<S> <C> <C> <C>
Revenue:
Patient services, net $ 16,457,451 $ 7,670,834 $ 5,741,894
Management services 1,962,803 1,760,075 717,423
Health and fitness center 450,625 521,414 564,987
Rental income 1,078,016 512,861
19,948,895 10,465,184 7,024,304
----------------- ------------ -----------------------
Direct costs:
Patient services 8,884,360 4,753,042 2,561,845
Management services 842,438 254,269 444,433
Health and fitness center 278,774 304,055 118,738
----------------- ------------ -----------------------
10,005,572 5,311,366 3,125,016
----------------- ------------ -----------------------
Gross profit 9,943,323 5,153,818 3,899,288
----------------- ------------ -----------------------
Operating expenses:
Salaries and employee benefits 3,552,430 2,716,304 2,011,950
Selling and administrative 6,994,583 3,730,504 3,526,479
Amortization 2,423,054 677,067 572,576
Depreciation 482,360 279,546 218,936
Provision for bad debts 2,147,140 590,656 374,601
Impaired asset write down 369,380
----------------- ------------ -----------------------
Total operating expenses 15,968,947 7,994,077 6,704,542
----------------- ------------ -----------------------
Loss from operations (6,025,624) (2,840,259) (2,805,254)
----------------- ------------ -----------------------
Non-operating expenses:
Interest expense 2,913,420 1,844,284 640,008
Factor fees 281,533 110,383
----------------- ------------ -----------------------
2,913,420 2,125,817 750,391
----------------- ------------ -----------------------
Net loss $ (8,939,044) $(4,966,076) $ (3,555,645)
================= ============ =======================
Basic net loss per share $ (.65) $ (.44) $ (.41)
================= ============ =======================
Diluted net loss per share $ (.65) $ (.44) $ (.41)
================= ============ =======================
Weighted average number of
common shares outstanding 13,758,587 11,326,617 8,744,842
================= ============ =======================
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Additional
Common Stock Preferred Stock Paid In Accumulated
----------------- ------------------
Shares Par Value Shares Par Value Capital Deficit Total
----------- ------------ ---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 10,491,326 10,491 17,868 32 7,286,388 (8,407,056) (1,110,145)
Net loss for the year ended
December 31, 1997 (as Restated,
See Note 17) (4,966,076) (4,966,076)
Issuance of common stock 1,785,587 1,786 2,056,207 2,057,993
Conversion of preferred stock
to common stock 416,615 417 (850) (6) 15,119 15,530
----------- ------------ ---------- ----------- ------------ ------------- -------------
Balance, December 31, 1997
(as Restated, See Note 17) 12,693,528 12,694 17,018 26 $ 9,357,714 $(13,373,132) $ (4,002,698)
Net loss for the year
ended December 31, 1998
(as Restated, See Note 16) (8,939,044) (8,939,044)
Issuance of common stock 2,063,554 2,063 1,224,538 1,226,601
Conversion of preferred stock
to common stock 1,192,046 1,192 (9,934) (9) 1,292,088 1,293,271
Reclass of unpaid services
to loans from officers (288,000) (288,000)
Redemption of warrants (500,000) (500,000)
----------- ------------ ---------- ----------- ------------ ------------- -------------
15,949,128 $ 15,949 7,084 $ 17 $11,086,340 $(22,312,176) $(11,209,870)
=========== ============ ========== =========== ============ ============= =============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------ ------------
As Restated As Restated
See Note 16 See Note 17
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,939,044) $(4,966,076) $(3,555,645)
Common stock issued for services
and interest expense 769,005 690,766 313,000
Contributed capital for services (288,000) 144,000
Non-cash adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 482,360 279,546 218,936
Amortization 2,423,054 677,067 572,576
Impaired asset write down 369,380
Allowance for doubtful accounts (224,069) (151,198) 2,021
(Increase) decrease in operating assets:
Accounts receivable (1,211,806) (1,329,723) (597,202)
Other current assets 36,708 (210,495) 63,230
Deposits 98,001 8,558 (73,050)
Deferred costs (65,000) 65,000
Other assets (372,025) (237,683) (180,787)
Increase (decrease) in operating liabilities:
Accounts payable 1,473,440 1,466,235 202,035
Lease payable 168,717
Accrued expenses (240,649) 1,759,275 (267,013)
Payroll taxes payable 1,360,078 1,487,928 (225,831)
Due to Medicare 1,692,389
-------------
Net cash used in operating activities (2,571,178) (590,800) (3,150,013)
------------- ------------ ------------
Cash flows from investing activities:
Increase in capitalized financing costs (1,828,938) (114,157) (378,775)
Purchase of property and equipment (3,852,028) (8,468,127) (18,014)
Purchase of contract rights (38,543)
-------------
Net cash used in investing activities (5,680,966) (8,582,284) (435,332)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock 256,597 948,817 1,176,276
Advances from officers 319,264 481,472 246,976
Repayment of notes (9,311,823) (618,080) (2,551,248)
Repayment of lease obligations (71,763) (17,413) (54,346)
Proceeds from short and long term debt 13,151,789 8,669,095 3,065,361
Increase in debt due to accrued interest 992,592
Proceeds from line of credit 2,726,463 (30,789) 1,613,029
------------- ------------ ------------
Net cash provided by financing activities 8,063,119 9,433,102 3,496,048
------------- ------------ ------------
Net increase (decrease) in cash (189,025) 260,018 (89,297)
Cash, beginning of period 304,267 44,249 133,546
------------- ------------ ------------
Cash, end of period $ 115,242 $ 304,267 $ 44,249
============= ============ ============
Supplemental disclosures of cash flows information:
Interest paid $ 815,705 $ 646,145 $ 616,749
============= ============ ============
Taxes paid $ -0- $ -0- $ -0-
============= ============ ============
Non-cash financing activities:
Redemption of warrants for debt $ 500,000
=============
Non-cash investing activities:
Businesses acquired $ 201,000 $ 200,000
============= ============
Common stock issued for services $ 769,005 $ 690,766 $ 313,000
============= ============ ============
</TABLE>
7
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. Restatement:
Subsequent to the issuance of the 1998 audited financial statements, it
came to management's attention that the 1998 financial statements contained
inaccuracies. The 1998 financial statements contained herein have been
restated (see Note 16). During the audit of the 1998 financial records, it
came to management's attention that the 1997 financial statements contained
inaccuracies. The 1997 financial statements contained herein have been
restated (see Note 17).
2. The Business:
CoreCare Systems, Inc., through its eight operating subsidiaries, provides
management services to behavioral service providers; provides, owns and
operates out-patient and inpatient behavioral health services; operates a
health and fitness center; develops billing software for the health
industry, leases space at the Kirkbride facility to third parties, and
provides clinical research services to the pharmaceutical industry.
3. Summary of significant accounting policies:
Principles of consolidation:
The December 31, 1998, 1997 and 1996 financial statements of the Company
include the accounts of CoreCare Systems, Inc., and its wholly owned
subsidiaries.
All material inter-company accounts and transactions have been eliminated
in consolidation.
Use of estimate:
In preparing financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities in
the Consolidated Balance Sheet and revenues and expenses in the
Consolidated Statements of Operations. Actual results could differ from
those estimates. Estimates made by management include: allowance for
doubtful accounts, contractual allowances, depreciation, amortization and
income taxes.
Concentration of credit risk:
Financial instruments which subject the Company to concentration of credit
risk consist of trade receivables from government health care systems, such
as Medicare, Medicaid and Community Behavioral Health care providers.
8
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. Summary of significant accounting policies (continued):
Year 2000 compliance:
The Company primarily uses licensed software products in its operations
with a significant portion of processes and transactions centralized in one
particular software package. During 1998 and 1999, management plans to
upgrade to the most current version of this software package which, among
other things, is Year 2000 compliant. Cost of the project has not yet been
determined.
Earnings (loss) per share:
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of shares of common stock. Diluted earnings
per share reflect the dilutive effect of an equivalent number of common
shares of convertible preferred stock, stock options and warrants. For the
years ended December 31, 1998, 1997 and 1996, the computation of diluted
loss per share was antidilutive; therefore, the amounts reported for basic
and diluted loss per share were the same.
Income taxes:
The provision for income taxes is based upon income recognized for
financial statement purposes and includes the effects of temporary
differences between such income and that recognized for the tax return
purposes. Future tax benefits, such as net operating loss carryforwards,
are recognized to the extent that realization of such benefits is more
likely than not.
Deferred finance costs:
Deferred finance costs arising from the acquisition of long term debt are
being amortized using the straight-line method over the terms of the
related subordinated convertible promissory notes.
Net patient service revenue:
Patient service revenue is recorded net of contractual allowances and
accounted for using the accrual method of accounting based upon the
Company's established standard rates during the period in which the
services are provided. Contractual and other allowances, including
uncollectible amounts, are accounted for on the accrual basis so as to
include accounts receivable and net patient revenue amounts expected to be
realized through payments from third-party payors and others. Revenue
received under certain third-party arrangements is subject to audit and
retroactive adjustment by such payors. Such adjustments are accrued for on
an estimated basis and adjusted when final settlements are determined.
9
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. Summary of significant accounting policies (continued):
Goodwill and contract rights:
Costs in excess of the fair value of net assets acquired are being
amortized on a straight-line basis over a 40 year period. Certain
acquisition costs are written off at an accelerated rate if it appears that
the economic value of such costs is reduced.
Contract rights are being amortized using the straight-line method of
accounting over a three to five year period.
Property, plant and equipment and depreciation:
Property, plant and equipment are stated at cost less accumulated
depreciation. Additions and betterments are capitalized and maintenance and
repairs are charged to current operations. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation and
amortization are removed from the accounts and the gain or loss on such
dispositions is included in current operations. Depreciation is provided
using the straight line method. Estimated useful lives of the assets are:
Buildings 31.5 to 40 years
Building improvements 31.5 to 40 years
Furniture and equipment 5 to 7 years
Automobiles 5 years
Reclassifications:
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 financial statement presentation. These adjustments
had no effect on net loss for that period.
10
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
4. Acquisitions:
Kirkbride Center:
On February 27, 1997, the Company, through its wholly-owned subsidiary,
CoreCare Behavioral Health Management, Inc., acquired the property of the
Institute of Pennsylvania Hospital and re-named it Kirkbride Center
(Kirkbride). Kirkbride is comprised of 420,000 square feet of commercial
real estate on 27 acres of land in West Philadelphia, Pennsylvania.
Kirkbride Center is licensed for 120 acute inpatient psychiatric beds and
63 drug and alcohol beds; 50 adult partial hospitalization slots; and
outpatient services. Of its 120 beds, 57 beds hold dual licensure to treat
substance abuse disorders. The Center also holds a provider 50 license for
mobile therapy services and has 24 licensed residential treatment beds.
The Company is utilizing approximately 50% of the facility for its
inpatient beds and outpatient services and leases the balance for medical
offices, a school, a food processing plant, a laundry and related
behavioral services.
The total purchase price of the facility was $4,500,000 plus closing costs
of $1,025,662. The closing costs were allocated to deferred financing costs
and the facility in the amounts of $462,940 and $562,722, respectively.
From the date of the acquisition through December 31, 1997, Kirkbride
capitalized $2,936,509 of costs associated with improving and carrying the
facility. During 1998, Kirkbride capitalized $1,563,797 of costs associated
with improving and carrying the facility.
In connection with the acquisition of Kirkbride, in January 1997, CoreCare
Realty Corp. was organized to manage the real estate assets of CoreCare
Systems, Inc., principally the Kirkbride Center. CoreCare Realty Corp. has
retained Franklin Realty Corp. (FRC) to provide the management services of
the real estate portion of Kirkbride and therefore has no employees. During
1997, FRC was paid $10,000 to manage Kirkbride. In the opinion of
management, the fee paid to FRC is an arm's length amount. Revenue is
derived from leases with tenants in Kirkbride Center which currently
include two major hospital systems in the Philadelphia area and individual
doctors who lease office space.
11
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
4. Acquisitions (continued):
Quantum Managed Mental Health Systems, Inc.:
On July 3, 1997, the Company acquired 100% of the outstanding common stock
of Quantum Managed Mental Health System, Inc. (Quantum) in exchange for
200,000 shares of its common stock. Quantum is a network of approximately
3,000 psychologists contractually organized as a Preferred Provider Network
for employee assistance programs.
Quantum commenced operations in 1998 and signed four clinical research
contracts which should generate revenue in 1999.
On June 30, 1997, the Company acquired the assets and certain liabilities
of ZA Consulting/Management, Inc. (ZA/CMI), a physician billing and
practice management services business. CoreCare's wholly-owned subsidiary,
Managed CareWare, Inc., d/b/a CoreCare Management, Inc. (CMI) operates the
company and has the responsibility for all of the Company's billing and
collections which were previously outsourced. The purchase price was $1.00
and the assumption of selected liabilities approximating $20,000. The
Company signed a demand note payable to the seller for the value of the
accounts receivable and work-in-process which is to be collected and
remitted to the seller. For the six months ended December 31, 1997, CMI had
revenue of $994,419 and a net income of $178,700.
Preferred Medical Services:
On April 15, 1998, Managed Careware acquired the assets of Preferred
Medical Services for $312,744. The purchase price was funded with 250,000
shares of CRCS common stock valued at $201,000 and a demand note for
$111,744 bearing interest of 5.54% per annum. During 1998, $30,550 was
paid. In December, 1998, the Company integrated the operations of Preferred
into CMI and closed their Blue Bell, Pennsylvania office.
5. Real estate and other assets held for sale:
On July 22, 1992, in connection with the acquisition of Lakewood Retreat,
Inc., the Company purchased real estate which included 56.7+ acres of
unimproved, - developable land. Upon acquisition, the cost allocated to the
developable land, of $115,857, was based upon the then fair market value of
the unimproved developable land.
12
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
5. Real estate and other assets held for sale (continued):
During the first quarter of 1996, the Company closed Lakewood Retreat, Inc.
It is currently held for sale. As of December 31, 1997, the facility was
recorded at its original cost, net of accumulated depreciation, $1,513,723.
The Company has adopted FASB Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of" and the real estate and other assets held for sale are valued at the
lower of cost or net realizable value. At December 31, 1998, the asset was
recorded at the lower of cost or the appraised value. In February 1999, the
Company received an offer to buy the property for $1,100,000 and the asset
was reduced at December 31, 1998 to reflect the offered price.
6. Accounts receivable:
In June 1998, the Company entered into a revolving line of credit pledging
the accounts receivable as collateral. This facility replaced the factoring
agreement which was in place from January 1996 through May 1998.
In January, 1996, a subsidiary of the company entered into an Agreement
with a factor whereby the Company can sell (with recourse) up to $2,500,000
of certain accounts receivable on a revolving basis. The agreement
obligates the subsidiary to repurchase accounts receivable which have
defaulted. Upon the sale of the accounts receivable to the factor, the
subsidiary receives proceeds of approximately 80% of such accounts
receivables. The factor holds approximately 19% of the accounts receivable
as a reserve. The reserves are maintained as a fixed percentage of the
cumulative balance of sold and unpaid receivables. Reserves in excess of
required balances are remitted to the subsidiary.
As a result of the Kirkbride Center acquisition, this arrangement was
expanded permitting the company to sell up to $5,000,000 of certain account
receivables in its Westmeade Center at Warwick and Kirkbride operations.
13
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
6. Accounts receivable (continued):
As of December 31, 1998 and 1997, accounts receivable and allowance for
doubtful accounts are as set forth below:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Total accounts receivable $5,341,418 $4,863,653
Accounts receivable sold to factor 1,134,111
---------- ----------
5,341,418 3,729,542
Allowance for doubtful accounts 930,000 1,154,069
---------- ----------
Accounts receivable, net $4,411,418 $2,575,473
========== ==========
</TABLE>
7. Property, plant and equipment:
As of December 31, 1998 and 1997, property, plant and equipment consists of
the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,637,329 $ 1,637,329
Buildings 4,864,635 4,864,635
Building improvements 7,378,221 3,780,801
Furniture and equipment 1,271,424 1,008,561
Automobiles 20,450 28,705
Property held for licensing 200,000 200,000
Furniture and equipment under
capital lease 235,307 235,307
------------ ------------
15,607,366 11,755,338
Less: Accumulated depreciation (1,455,579) (1,027,953)
------------ ------------
$14,151,787 $10,727,385
============ ============
</TABLE>
14
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
8. Income taxes:
At December 31, 1998, 1997 and 1996, the Company had net operating loss
carryforwards available to reduce future federal taxable income of
approximately $22,000,000, $13,000,000 and $8,000,000, respectively. The
carryforwards expire through 2011.
9. Bank lines of credit:
In May, 1996, the Company entered into a bank line of credit facility
agreement for $1,100,000. The credit line facility bears interest at the
bank's prime rate and is collateralized by marketable securities pledged by
the officers. At December 31, 1998 and 1997, borrowings against the line of
credit totaled the maximum outstanding during the year, $1,100,000.
The Company has also borrowed $468,500 under its August 1996 line of credit
facility agreement with another bank which is collateralized by marketable
securities pledged by the Company's officers. Interest on outstanding
balances accrues at the rate of prime plus 1.5%. At December 31, 1998 and
1997, borrowings against the line of credit totaled the maximum outstanding
during the year, $468,500.
A line of credit in the amount of $44,529 was issued to Lakewood Retreat
Inc. (Lakewood), a wholly owned subsidiary of the Company, at an interest
rate of 10.25%. At December 31, 1997, borrowings against the line of credit
facility totaled $13,740. This loan was guaranteed by the officers.
In May, 1998, the Company entered into a line of credit agreement with a
financial corporation for $5,000,000. The credit line bears interest at the
bank's prime rate. At December 31, 1998, borrowings against the line of
credit totaled $2,740,203.
15
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. Long term debt:
1998 1997
---------- --------
<S> <C> <C>
Mortgage note payable:
Payable in monthly installments of $3,500
plus interest at the rate of 11% per annum.
The mortgage is collateralized by assets of
Lakewood which include real estate held for
sale or development and property, plant and
equipment having a net book value of
$1,631,973. The mortgage note payable was
to mature on September 16, 1996 but was
extended to December 17, 1996. The terms
for the extension require the Company to
reduce the principal $50,000 in September,
October, and November of 1996 and to issue
15,000 shares of its common stock to the
mortgagee. Payment has not been made during
1997. In 1997, the Company signed an agreement
whereby the mortgagee can sell the property.
The 1998 amount includes all accrued and
unpaid interest. $1,350,000 $702,000
Mortgage note payable (continued):
Interest is payable monthly at LIBOR plus
6.5% per annum. The mortgage is
collateralized by assets of CoreCare
Behavioral Health Management, Inc.
which includes property, plant, equipment,
investments and all proceeds and products
of the Company. The mortgage note matures
on August 26, 1998 but may be extended
to February 26, 1999 by exercising an option
contained in the loan indenture. Upon the
repayment of the note, the lender will
charge additional interest as stated in the
loan document. At December 31, 1997 the
additional interest due was $1,098,252 and
was recorded as accrued interest expense.
(See Note 4 Acquisitions, Kirkbride) 6,440,000
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. Long term debt (continued):
1998 1997
- --------------------------------------------------- -----------
<S> <C> <C>
Interest is payable monthly at LIBOR plus
6.5% per annum. The mortgage is collateralized
by assets of CoreCare Behavioral Health
Management, Inc. which includes property,
plant, equipment, investments and all proceeds
and products of the Company. The mortgage
note matured on February 26, 1999, but the
mortgagee extended the maturity to June 30, 1999.
The mortgage holder has 600,000 shares of
common stock of the Company in escrow as
additional collateral which will be returned
upon repayment of the mortgage debt. $13,000,000
In June 1996, through a refinance of the then
existing debt, the Company obtained financing
pursuant to a mortgage note payable to an
independent finance company. The mortgage
note which bears interest at the average
rate of 10.9% per annum matures on July 1,
2001. The mortgage is being amortized over
20 years with 59 monthly payments of $18,249
and a final payment of $1,629,160. The note
is secured by the Warwick, Pennsylvania
facility, is partially guaranteed by two officers
and shareholders of CoreCare Systems, Inc.
and a letter of credit for $175,000. 1,706,745 1,737,181
In February 1997, the Company obtained
financing pursuant to a mortgage note
payable to an independent finance company.
The mortgage matures on June 27, 2001. The
mortgage is being amortized over 20 years
with 59 monthly payments of $5,140 and shall
be paid without offset. The note bears interest
at a rate of 10.94% per annum. The note is
secured by the Warwick, Pennsylvania facility,
is partially guaranteed by two officers and
shareholders of CoreCare Systems, Inc. 486,604 494,566
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. Long term debt (continued):
1998 1997
- ----------------------------------------------- -------
<S> <C> <C>
Notes payable:
The investor promissory note bears interest
at the prime rate of interest per annum and
is due on demand. The note matures on
October 1, 2019. Subordinated Payment
Bonds owned by two officers-shareholders
of the Company are pledged as collateral. 50,000
Convertible promissory notes bear interest
at the rate of 10% per annum. At the option
of the note holder, these notes can be
converted into common stock of the Company
at a conversion price of $2.00 per share. 10,000 10,000
Subordinate note bears interest at the rate
of 12% per annum. The note requires interest
payments quarterly and principal payments
of $166,666 on December 31, 1998, 1999 and
2000. Associated with the note is a warrant
to purchase 333,000 shares of common stock
at $1.50 per share until August, 2001. 500,000 500,000
Demand note payable bears interest at the
lowest rate allowable under Section 7872
of the Internal Revenue Code for work-in-
process payments and the prime interest
rate for accounts receivable. 110,957 204,421
Notes which bear interest at a rate of 3%
per calendar quarter. The notes mature at
various dates throughout 1998. The notes
are secured by a personal guarantee of
the Company's principal shareholders. 625,000
Note which bears interest at a rate of 11%
per annum. The principal amount together
with all interest accrued through December
1997 is due June 1998. This has been
extended to December 31, 1999. 300,000 530,000
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. Long term debt (continued):
1998 1997
----------- -----------
<S> <C> <C>
The secured note bears interest at a rate of
14% per annum and matures July 1998. The
note is collateralized by equipment and
accounts receivable. At the option of the
note holder, the note was converted
into common stock of the Company. 300,000
Notes which bear interest at annual
interest rates from 9.75% to 11.75% per
annum. The notes matured during 1998. 117,147
Investor notes bearing interest from
6% to 12% per annum and maturing
at various dates through 2000. The 1998
amount includes accrued and unpaid interest. 430,900 535,908
Note payable bearing interest at the rate
of 8% per annum due upon the successful
filing of a Regulation S Underwriting. The
1998 amount includes accrued and unpaid
interest. 314,592 150,000
Demand note payable for the acquisition of
Preferred Medical Services, Inc. bearing
interest of 5.54%. 81,092
-----------
18,290,890 12,396,223
Less amount due in one year 16,191,983 10,203,425
----------- -----------
$ 2,098,907 $ 2,192,798
=========== ===========
</TABLE>
The amounts of principal repayments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $16,191,983
2000 47,749
2001 1,646,001
2002 405,157
-----------
$18,290,890
===========
</TABLE>
19
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
11. Commitments and contingencies:
Operating leases:
Facility leases:
Fitness center:
The Company leases its fitness center under a noncancellable operating
lease expiring in August 1997. The facility has a month to month
understanding given the Company's interest in moving to a new location.
Monthly lease payments are $13,000. Under the terms of the lease, the
Company is responsible for substantially all operating costs.
Acquisition of ZA Consulting/Management, Inc. Lease:
On June 30, 1997, the Company (CMI) acquired ZA Consulting/Management, Inc.
and assumed its office lease. The initial lease agreement was made on
January 8, 1993 and was amended on February 1, 1995 and December 4, 1997.
The lease has a termination date of July 31, 2000 with a one time extension
renewal option for an additional three years. Monthly rental payments are
$7,152. Rent expense from the date of acquisition through December 31, 1997
was $42,912. Rent expense for 1998 was $85,822.
Closure of Wyndmoor, Pennsylvania Facility:
In December 1996, the Company ceased operations at its Wyndmoor,
Pennsylvania facility. The facility was leased through December 31, 1998
for $15,000 per month until it was modified. Rent expense under this lease
was $75,000 for the year ended December 31, 1997.
20
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
11. Commitments and contingencies (continued):
The Company and the lessor agreed to terminate the lease on August 12,
1997. In consideration of the lessor allowing the Company to terminate the
lease agreement and in settlement for all amounts due and outstanding or
owed in the future under the lease, the Company shall pay the lessor a
termination settlement fee of $202,000. The Company and the lessor agreed
that the Company shall pay the termination fee to the lessor in monthly
payments due the first Thursday of each month. The Company made payments
totaling $51,190 in 1997. Starting on April 2, 1998 and for an additional
47 months, a monthly payment of $3,000 will be made to the lessor. The
balance due at December 31, 1998 and 1997 is $132,032.
The termination agreement payments were discounted at 10%. The Company
accrued as an expense the present value of the future payments for the year
ended December 31, 1996.
In addition to the lease termination fee, the Company accrued $20,000 for
costs associated with the closing of the facility.
In September, 1997, the Company transferred the Wyndmoor license to its
Kirkbride facility.
Equipment lease:
In January, 1998 the Company entered into equipment leases whereby it pays
the lessor $8,096 per month for sixty months.
The minimum annual operating lease payments for the facilities and
equipment are as follows:
<TABLE>
<CAPTION>
Facilities Equipment
----------- ----------
<S> <C> <C>
1999 $ 85,040 $ 97,152
2000 50,064 97,152
2001 97,152
2002 97,152
</TABLE>
Litigation:
In the ordinary course of business, the Company and its subsidiaries are
involved in and subject to claims, contractual disputes and other
uncertainties. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial condition.
21
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. Description of securities:
Authorized shares:
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.001 per share and 5,000,000 shares of Preferred
Stock, as to which the Board has the power to designate the rights, terms,
preferences, etc. Of the initially undesignated Preferred Stock 10,000
shares have been designated as Series A Preferred Stock. 25,000 shares have
been designated as Series C Convertible Preferred Stock, 15,000 shares have
been designated as Series D Preferred Stock, 13,250 shares have been
designated as Series E Convertible Preferred Stock, and 6,000 shares have
been designated as Series F Convertible Preferred Stock.
Common stock:
The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
par value per share. As of December 31, 1998 and 1997, 15,949,128 and
12,693,528 shares were issued and outstanding, respectively. Holders of
Common Stock are entitled to one vote for each share of Common Stock owned
of record on all matters to be voted on by stockholders, including the
election of directors. The holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board
of Directors, in its discretion, from funds legally available therefor.
The rights of holders of Common Stock to receive dividends are subject to
the dividend rights of the holders of Preferred Stock, as described below.
Similarly, the rights of holders of Common Stock, upon liquidation or
dissolution of the Company, are subject to the preferences afforded to
holders of the Company's Preferred Stock.
The Common Stock has no preemptive or other subscription rights, no
cumulative voting rights, and there are no conversion rights or redemption
provisions. All outstanding shares of Common Stock are validly issued,
fully paid, and nonassessable.
Preferred stock:
Holders of Preferred Stock vote as a class with holders of Common Stock,
except that without the vote or consent of the holder of at least 67% of
each respective series of the Preferred Stock then outstanding, the Company
may not (i) create or issue any class or series of capital stock ranking,
either as to payment of dividends, distribution of assets or redemptions,
prior to such series of Preferred Stock, (ii) alter or change the
designations, powers, preferences, or rights, or the qualifications,
limitations or restrictions of such series of Preferred Stock.
22
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. Description of securities (continued):
Holders of Series C, D, E and F Preferred Stock are entitled to vote in the
election of directors and on all other matters submitted to stockholders
for their approval or consent. None of the Preferred Stock has any
cumulative voting rights. The number of votes is equal to the number of
shares of Common Stock into which their Preferred Stock is convertible at
the time of the meeting at which the vote is cast or, in the case of an
action of stockholders taken without a formal meeting, on the date of such
action, except that each Preferred A and D shares, which have no conversion
rights, are entitled to 65 and 50 votes, respectively, per share.
Series A Preferred Stock:
The Company has authorized 10,000 shares of Series A Preferred Stock, $.001
par value per share, of which 6,000 shares are issued and outstanding as of
December 31, 1998 and 1997. The Company's Series A Preferred Stock has a
liquidation value of $100.00 per share ($600,000 in the aggregate) in
liquidation of the Company; a preference over Common Stock to the extent of
its liquidation value; and is entitled to annual dividends in the amount of
$4.00 per share (i.e., an annual rate of four (4%) percent) payable
semi-annually in arrears unless and until a "Dividend Reset Event" occurs.
No dividends have ever been declared. After a Dividend Reset Event, the
annual dividend rate on Series A Preferred will be increased from four (4%)
percent to a rate equal to the "prime rate" as published in the Wall Street
-----------
Journal as of the last business day preceding the Dividend Reset Event plus
-------
six (6%) percent. The Series A Preferred is redeemable by the Company, at
liquidation value, in whole or in part, at any time after a Dividend Reset
Event, upon not less than thirty (30) days written notice. The term
"Dividend Reset Event" is defined to mean either (a) a public offering of
equity securities by the Company or any corporation which owns 50% or more
of all classes of the Company's common stock then outstanding (hereinafter,
a "Parent of the Company") which results in the Company's receipt (or
receipt by the Parent of the Company) of not less than $5,000,000 net of
offering underwriting discounts and commissions, or (b) either the Company
and/or the Parent of the Company, on a consolidated basis, having as of any
fiscal year-end stockholders' equity of $12,000,000 or more.
The Company has the right to redeem the Series A Preferred Stock after the
Dividend Reset Date and upon not less than 30 days notice at $100.00 per
share plus accrued dividends.
23
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. Description of securities (continued):
Series B Convertible Preferred Stock:
The Company has authorized 7,000 shares of Series B Convertible Preferred
Stock. All previously outstanding shares of Series B Preferred were
converted on June 30, 1996. There were no shares of Series B Preferred
outstanding as of December 31, 1998 and 1997.
Holders of Series B Preferred are entitled to receive annual dividends
equal to the dividends payable on Series A Preferred Stock, no dividend has
ever been declared, and to convert shares of Series B Preferred into Common
Stock on the basis of 92 shares of Common Stock per share of Series B
Preferred Stock. Conversion prices/ratios will be adjusted in the event of
any stock splits, dividends on Common Stock payable in Common Stock or
similar events. Series B Preferred Stock has a liquidation value of $100.00
per share in liquidation of the Company.
The Company has the right to redeem the Series B Shares at $100 per share
plus accrued dividends upon not less than thirty (30) days written notice.
Series C Convertible Preferred Stock:
The Company has authorized 25,000 shares of Series C Convertible Preferred
Stock, of which 8,147.3 shares are issued and outstanding as of December
31, 1998 and 1997. Holders of shares of Series C Convertible Preferred
Stock (the "Series C Preferred") are entitled to annual dividends of $6.00
per share, payable semi-annually. No dividends have ever been declared.
Each share of Series C Preferred are convertible at the option of its
holder into 66.67 shares of Common Stock. Conversion prices/ratios will be
adjusted in the event of any stock splits, dividends on Common Stock
payable in Common Stock or similar events. Series C Preferred Stock has a
liquidation value of $100.00 per share plus accrued dividends in
liquidation of the Company; and is superior in rank to all other stock of
the Company except for Preferred Series E which shares the same rank.
The Company has the right to redeem the Series C Shares at $100 per share
plus accrued dividends upon not less than thirty (30) days written notice.
24
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. Description of securities (continued):
Series D Preferred Stock:
The Company's Board of Directors has designated 15,000 shares of its
Preferred Stock as Series D Preferred Stock, of which no shares are issued
and outstanding as of December 31, 1998 and 1997. Holders of shares of
Series D Preferred Stock (the "Series D Preferred") are entitled to annual
dividends of $6.00 per share, payable semi-annually. Series D Preferred
Stock has a liquidation value of $100.00 per share in liquidation of the
Company and is equal in rank to the Series A Preferred.
The Company has the right to redeem the Series D Shares at $100.00 per
share plus accrued dividends upon not less than thirty (30) days written
notice.
Series E Convertible Preferred Stock:
The Company's Board of Directors has designated 13,250 shares of its
preferred Stock as Series E Preferred Stock, of which 9,934 shares were
issued and outstanding as of December 31, 1997. On December 31, 1998, the
9,934 shares of outstanding Series E Preferred Stock was converted into
1,192,046 shares of common stock. Holders of shares of Series E Preferred
Stock (the "Series E Preferred") are entitled to annual dividends of $6.00
per share payable semi-annually. No dividends have ever been declared.
Prior to the Series E Redemption Date, each share of Series E Preferred is
convertible at the option of its holder into 100 shares of Common Stock.
Conversion prices/ratios will be adjusted in the event of any stock splits,
dividends on Common Stock payable in Common Stock or similar events. Series
E Preferred Stock has a liquidation value of $100.00 per share in
liquidation of the Company, and is superior in rank to all stock of the
Company except for Series C which shares the same rank.
After October 26, 2000, the Company has the right to redeem the Series E
shares upon not less than 30 days written notice at $100.00 per share plus
accrued dividends. On or after October 26, 2005, holders of Series E Shares
have the right to require the Company to redeem shares not previously
converted or redeemed. No dividends have ever been declared.
25
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. Description of securities (continued):
Series F Convertible Preferred Stock:
The Company's Board of Directors has designated 6,000 shares of its
Preferred Stock as Series F Convertible Preferred Stock, of which 2,870.6
shares are issued and outstanding as of December 31, 1998 and 1997. Holders
of shares of Series F Convertible Preferred Stock (the "Series F Preferred)
are entitled to annual dividends of $6.00 per share, payable semi-annually.
No dividends have ever been declared.
Each share of Series F Preferred is convertible at the option of its holder
into 50.00 shares of Common Stock. Conversion prices/ratios will be
adjusted in the event of any stock splits, dividends on Common Stock
payable in Common Stock or similar events. Series F Preferred has a
liquidation value of $100.00 per share in liquidation of the Company, and
is equal in rank to Series A Preferred.
The Company has the right to redeem the Series F Shares upon not less than
thirty (30) days written notice at $100.00 per share plus accrued
dividends.
Stock options:
At December 31, 1998 and 1997, there were 1,241,105 and 1,204,445 options
outstanding, respectively. The average exercise price of $1.08 was above
the average market price of $1.00. The options expire at various dates from
July 6, 2001 through January 30, 2003.
Stock warrants:
At December 31, 1998 and 1997, there were 4,845,693 and 2,526,793 warrants
outstanding, respectively. The average exercise price of $1.82 was above
the average market price of $1.00. During 1997, 50,000 warrants expired.
During 1998, 500,000 warrants were converted to a note payable for
$500,000. The outstanding warrants at September 30, 1998 expire December
31, 2000 through December 31, 2004.
13. Obligations under capital leases:
The assets and liabilities under capital leases are recorded at the lower
of the present value of the minimum lease payment or the fair value of the
assets. The assets are amortized over their estimated productive lives.
Amortization of the assets under capital leases are included in
depreciation and amortization expense for the years ended December 31, 1998
and 1997. Lease payments vary according to the aggregate assets under lease
and are payable in monthly installments ($6,600 at December 31, 1997)
including interest imputed at the approximate rate of 10%. The Company
assumed current capitalized lease obligations approximately $50,000 when it
acquired the management service company.
26
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
13. Obligations under capital leases (continued:
As of December 31, 1997, minimum future lease payments under these capital
lease obligations are as follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Year ending December 31, 1997 $79,736
-------
Total minimum lease payments 79,736
Less amount representing interest 7,973
-------
Present value of net minimum lease payments $71,763
=======
Current portion $71,763
=======
</TABLE>
14. Net patient service revenue:
The Company books revenue at a set charge rate. The Company has contracts
with its payors. The contracts have an agreed upon per diem rate. The
difference between the contractual rate and the gross charges is recorded
as contractual allowance.
Net patient service revenue for the years ended December 31, 1998, 1997 and
1996, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Patient service revenue $54,441,933 $19,799,545 $9,223,976
Contractual adjustments 37,984,482 12,128,711 3,482,082
----------- ----------- ----------
Net patient service revenue $16,457,451 $ 7,670,834 $5,741,894
=========== =========== ==========
</TABLE>
15. Subsidiary companies' financial information:
In 1998 and 1997, the Company has two subsidiaries which account for more
than twenty percent of revenue and/or assets, Westmeade Healthcare, Inc.
and CoreCare Behavioral Health Management, Inc. In 1996, Westmeade
Healthcare, Inc. accounted for more than twenty percent of the revenue and
assets.
27
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. Subsidiary companies' financial information (continued)
As of December 31, 1998 and 1997, highlights of subsidiary financial
information is summarized below.
<TABLE>
<CAPTION>
WESTMEADE HEALTHCARE, INC.
(WHOLLY OWNED SUBSIDIARY)
BALANCE SHEET FINANCIAL HIGHLIGHTS
1998 1997
---------- ----------
<S> <C> <C>
Current assets $2,505,682 $2,222,422
Property, plant and equipment
(net of accumulated depreciation) 1,453,742 1,487,889
Other assets 291,201 325,794
---------- ----------
Total assets $4,250,625 $4,036,105
========== ==========
Current liabilities $ 685,285 $ 423,922
Long term liabilities 2,187,518 2,231,746
Shareholder Equity 1,377,822 1,380,437
---------- ----------
$4,250,625 $4,036,105
========== ==========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
WESTMEADE HEALTHCARE, INC.
(WHOLLY OWNED SUBSIDIARY)
STATEMENTS OF OPERATING HIGHLIGHTS
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Patient service revenue $2,519,219 $1,865,388 $4,296,398
Direct operating costs 1,023,776 1,250,481 1,907,438
----------- ----------- ----------
Gross profit 1,495,443 614,907 2,388,960
Operating expenses 1,344,927 491,028 1,447,706
Other non-operating expenses 153,133 309,817 289,397
----------- ----------- ----------
Net income (loss) $ (2,617) $ (185,938) $ 651,857
=========== =========== ==========
</TABLE>
29
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. Subsidiary companies' financial information (continued):
<TABLE>
<CAPTION>
WESTMEADE HEALTHCARE, INC.
(WHOLLY OWNED SUBSIDIARY)
STATEMENTS OF CASH FLOWS HIGHLIGHTS
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Net income (loss) $ (2,617) $(185,938) $ 651,857
Net cash provided by (used in)
operating activities 46,845 475,862 (1,406,473)
Net cash provided by investing activities
Net cash used by financing activities (44,228) (478,019) 838,128
---------- ---------- ------------
Net decrease in cash (188,095) 83,512
Cash, beginning 0 188,095 104,583
---------- ---------- ------------
Cash, ending $ -0- $ -0- $ 188,095
========== ========== ============
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
CORECARE BEHAVIORAL HEALTH MANAGEMENT
(WHOLLY OWNED SUBSIDIARY)
BALANCE SHEET FINANCIAL HIGHLIGHTS
1998 1997
------------ ------------
<S> <C> <C>
Current assets $ 4,104,899 $ 2,038,329
Property, plant and equipment, net 12,082,111 8,128,257
Other assets 527,988 161,460
------------ ------------
Total assets $16,714,998 $10,328,046
============ ============
Current liabilities $21,660,142 $ 3,767,003
Long term liabilities 0 7,538,252
Shareholders equity (4,945,144) (977,209)
------------ ------------
Total liabilities and shareholder equity $16,714,998 $10,328,046
============ ============
</TABLE>
31
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. Subsidiary companies' financial information (continued):
<TABLE>
<CAPTION>
CORECARE BEHAVIORAL HEALTH MANAGEMENT
(WHOLLY OWNED SUBSIDIARY)
STATEMENTS OF OPERATING HIGHLIGHTS
1998 1997 1996
------------ ------------ --------
<S> <C> <C> <C>
Patient service revenue $13,018,098 $ 6,129,271 $717,423
Rental income 1,078,016 512,861
Direct operating costs 7,496,288 3,101,652
------------ ------------ --------
Gross profit 6,599,826 3,540,480 717,423
Operating expense 9,994,063 3,341,828 598,848
Other non-operating expense 692,159 1,371,716
------------ ------------ --------
Net income (loss) $(4,086,396) $(1,173,064) $118,575
============ ============ ========
</TABLE>
<TABLE>
<CAPTION>
CORECARE BEHAVIORAL HEALTH MANAGEMENT
(WHOLLY OWNED SUBSIDIARY)
STATEMENTS OF CASH FLOWS HIGHLIGHTS
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) $(4,086,396) $(1,173,064) $ 118,575
Net cash provided by (used in)
operating activities 3,197,031 (9,375,075) (118,323)
Net cash used in investing activities (4,317,972)
Net cash provided by financing 4,799,651 11,070,815
------------ ------------
Net increase (decrease) in cash (407,686) 522,676 252
Cash, beginning 522,928 252
------------ ------------ ----------
Cash, ending $ 115,242 $ 522,928 $ 252
============ ============ ==========
</TABLE>
32
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement:
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1998, it was determined that the
reported 1998 results were overstated. Upon examination, it was determined
that certain revenue was improperly recorded, certain expenses were not
properly accrued for and certain debt interest was not properly accounted
for.
The 1998 revenue overstatement was caused by inadequate contractual
allowance calculations and inadequate reserves for retroactive changes and
patient day denials. The expenses were understated due to inadequate
provision for accrued unpaid operating expenses and incorrect recording of
accrued unpaid interest on debt.
As a result, the accompanying consolidated financial statements as of and
for the year ended December 31, 1998 present the restated results.
A summary of the effects of the restatement follows:
33
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
ASSETS
December 31, 1998
-------------------------------
As previously
Reported Restated
------------------ -----------
<S> <C> <C>
Current assets:
Cash $ 115,242 $ 115,242
Accounts receivable, net 5,588,188 4,411,418
Prepaid and other current assets 224,215 175,659
------------------ -----------
Total current assets 5,927,645 4,702,319
------------------ -----------
Contract rights, net of accumulated amortization
of $1,023,619 in 1998 and $531,011 in 1997 265,300 265,300
------------------ -----------
Real estate and other assets held for sale 1,100,000 1,100,000
------------------ -----------
Property, plant and equipment, net 14,151,787 14,151,787
------------------ -----------
Other assets:
Goodwill, net of accumulated amortization
of $496,924 in 1998 and $257,598 in 1997 1,527,981 1,705,231
Deferred finance costs, net of accumulated
amortization of $1,759,635 in 1998 and
$241,648 in 1997 443,172 443,172
Security deposits 109,334 10,467
Restricted cash 207,041 207,041
Other 981,436 609,610
------------------ -----------
3,268,964 2,975,521
------------------ -----------
$ 24,713,696 $23,194,927
================== ===========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1998
-------------------------------------
As Previously
Reported As Restated
---------------------- -------------
<S> <C> <C>
Current liabilities:
Line of credit $ 4,308,703 $ 4,308,703
Current portion of:
Long-term debt 15,199,388 16,191,983
Lease termination fee payable 38,565 38,565
Account payable 3,748,884 3,748,882
Advances, officers-shareholders 910,692 1,332,692
Accrued expenses 840,354 1,851,026
Payroll and payroll taxes payable 3,048,183 3,048,183
Due to Medicare 1,000,000 1,692,389
---------------------- -------------
29,094,769 32,212,423
---------------------- -------------
Long term liabilities:
Notes payable 2,098,907 2,098,907
Lease termination fee 93,467 93,467
---------------------- -------------
2,192,374 2,192,374
---------------------- -------------
Shareholders' deficiency:
Preferred stock 17 17
Common stock 15,949 15,949
Additional paid in capital 11,374,340 11,086,340
Accumulated deficit (17,963,753) (22,312,176)
---------------------- -------------
(6,573,447) (11,209,870)
---------------------- -------------
$ 24,713,696 $ 23,194,927
====================== =============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. Restatement (continued):
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, 1998
---------------------------------
As Previously
Reported Restated
------------------- ------------
<S> <C> <C>
Revenue:
Patient services, net $ 18,125,610 $16,457,451
Management services 1,962,803 1,962,803
Health and fitness center 450,625 450,625
Rental income 1,078,016 1,078,016
------------------- ------------
21,617,054 19,948,895
------------------- ------------
Direct costs:
Patient services 8,684,360 8,884,360
Management services 842,438 842,438
Health and fitness center 278,774 278,774
------------------- ------------
9,805,572 10,005,572
------------------- ------------
Gross profit 11,811,482 9,943,323
------------------- ------------
Operating expenses:
Salaries and employee benefits 3,418,430 3,552,430
Selling and administrative 5,906,911 6,994,583
Amortization 2,423,054 2,423,054
Depreciation 482,360 482,360
Provision for bad debts 1,946,140 2,147,140
Impaired asset write down 369,380 369,380
------------------- ------------
Total operating expenses 14,546,275 15,968,947
------------------- ------------
Income (loss) from operations (2,734,793) (6,025,624)
------------------- ------------
Non-operating expenses:
Interest expense 1,855,828 2,913,420
------------------- ------------
1,855,828 2,913,420
------------------- ------------
Net loss $ (4,590,621) $(8,939,044)
=================== ============
Basic net loss per share $ (0.33) $ (0.65)
=================== ============
Diluted net loss per share $ (0.33) $ (0.65)
=================== ============
Weighted average number of
common shares outstanding 13,758,587 13,758,587
=================== ============
</TABLE>
36
<PAGE>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. Restatement
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1997, it was determined that the
reported 1997 results were overstated. Upon examination, it was determined
that certain revenue was improperly recorded. The Company's two
subsidiaries, CoreCare Behavioral Health Management and Westmeade
Healthcare, Inc. over accrued the amounts due from their third party
provider, Community Behavioral Health. The over accrual resulted from
miscalculation of the allowable per diem charges for in-patient services.
As a result of the miscalculation of the allowable per diem charges for
in-patient service, management projected that the Company would be
profitable in 1998 and, in accordance with SFAS 109, record a deferred tax
benefit. Had the correct per diem charges been used in the projection for
1998 operations, the deferred tax benefit would not have been recognized.
As a result, the accompanying consolidated financial statements as of and
for the year ended December 31, 1997 present the restated results.
A summary of the effects of the restatement follows:
37
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. Restatement (continued):
ASSETS
December 31, 1997
--------------------------------
As Previously
Reported As Restated
------------------ ------------
<S> <C> <C>
Current assets:
Cash $ 304,267 $ 304,267
Accounts receivable, net 4,955,473 2,575,473
Prepaid and other current assets 212,367 212,367
Deferred income taxes 1,555,000
------------------
Total current assets 7,027,107 3,092,107
------------------ ------------
Contract rights, net of accumulated
amortization of $1,023,619 in 1998
and $531,011 in 1997 548,663 548,663
------------------ ------------
Real estate and other assets held for sale 1,513,723 1,513,723
------------------ ------------
Property, plant and equipment net 10,727,385 10,727,385
------------------ ------------
Other assets:
Goodwill, net of accumulated amortization
of $496,924 in 1998 and 257,598 in 1997 1,801,155 1,801,155
Deferred finance costs, net of accumulated
amortization of $1,759,635 in 1998 and
$241,648 in 1997 305,354 305,354
Security deposits 108,468 108,468
Restricted cash 197,394 197,394
Deferred income taxes 2,228,732
Other 247,232 247,232
------------------ ------------
4,888,335 2,659,603
------------------ ------------
$ 24,705,213 $ 18,541,481
================== ============
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. Restatement (continued):
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1997
----------------------------------
As Previously
Reported As Restated
------------------- -------------
<S> <C> <C>
Current liabilities:
Line of credit $ 1,582,240 $ 1,582,240
Current portion of:
Long-term debt 10,203,425 10,203,425
Lease termination fee payable 38,565 38,565
Obligations under capital lease 71,763 71,763
Accounts payable 2,275,442 2,275,442
Advances, officers-shareholders 1,013,428 1,013,428
Accrued expenses 2,091,675 2,091,675
Payroll and payroll taxes payable 1,688,105 1,688,105
------------------- -------------
Total current liabilities 18,964,643 18,964,643
------------------- -------------
Long term liabilities:
Notes payable 2,192,798 2,192,798
Lease termination fee payable 93,467 93,467
------------------- -------------
2,286,265 2,286,265
------------------- -------------
Commitments and contingencies
Company obligated mandatorily redeemable
Series E convertible preferred stock
(redemption value $943,400 in 19987 and
1997) 1,293,271 1,293,271
------------------- -------------
Shareholders' equity (deficiency):
Preferred stock 26 26
Common stock 12,694 12,694
Additional paid in capital 9,357,714 9,357,714
Accumulated deficit (7,209,400) (13,373,132)
------------------- -------------
2,161,034 (4,002,698)
------------------- -------------
$ 24,705,213 $ 18,541,481
=================== =============
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. Restatement (continued):
December 31, 1997
------------------------------
As Previously
Reported As Restated
--------------- -------------
<S> <C> <C>
Revenue:
Patient services, net $ 10,050,834 $ 7,670,834
Management services 1,760,075 1,760,075
Health and fitness center 521,414 521,414
Rental income 512,861 512,861
--------------- -------------
12,845,184 10,465,184
--------------- -------------
Direct costs:
Patient services 4,753,042 4,753,042
Management services 254,269 254,269
Health and fitness center 304,055 304,055
--------------- -------------
5,311,366 5,311,366
--------------- -------------
Gross profit 7,533,818 5,153,818
--------------- -------------
Operating expenses:
Salaries and employee benefits 2,716,304 2,716,304
Selling and administrative 3,730,504 3,730,504
Amortization 677,067 677,067
Depreciation 279,546 279,546
Provision for bad debts 590,656 590,656
Impaired asset write down
Total operating expenses 7,994,077 7,994,077
--------------- -------------
Loss from operations (460,259) (2,840,259)
--------------- -------------
Non-operating expenses:
Interest expense 1,844,284 1,844,284
Factor fees 281,533 281,533
--------------- -------------
2,125,817 2,125,817
--------------- -------------
Net loss before income tax benefit (2,586,076) (4,966,076)
Income tax (benefit) expense 3,783,732
---------------
Net income (loss) $ 1,197,656 $ (4,966,076)
=============== =============
Basic net income (loss) per share $ .11 $ (.44)
=============== =============
Diluted net income (loss) per share $ .08 $ (.44)
=============== =============
Weighted average number of
common shares outstanding 11,326,617 11,326,617
=============== =============
</TABLE>
40
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 115242
<SECURITIES> 0
<RECEIVABLES> 5341418
<ALLOWANCES> 930000
<INVENTORY> 0
<CURRENT-ASSETS> 4702319
<PP&E> 15607366
<DEPRECIATION> 1455579
<TOTAL-ASSETS> 23194927
<CURRENT-LIABILITIES> 32213423
<BONDS> 2192374
0
17
<COMMON> 15949
<OTHER-SE> (11225836)
<TOTAL-LIABILITY-AND-EQUITY> 23194927
<SALES> 0
<TOTAL-REVENUES> 19948895
<CGS> 0
<TOTAL-COSTS> 10005572
<OTHER-EXPENSES> 13821807
<LOSS-PROVISION> 2147140
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8939044)
<EPS-BASIC> (.65)
<EPS-DILUTED> (.65)
</TABLE>
