SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
215/471-2358
(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 [_] No [X]
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 $25,799,731
The aggregate market value of the common equity held by non-affiliates
based on the closing sale price of Common stock as of September 15, 2000 was
$1,712,228.
The number of shares outstanding of each class of the issuer's common
equity, as of September 15, 2000 was as follows: Common Stock - 17,122,778
shares.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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CORECARE SYSTEMS, INC.
FORM 10-KSB
TABLE OF CONTENTS
-------------------
PART I
ITEM 1- BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2- PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . .12
ITEM 3- LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . .12
ITEM 4- SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . .13
PART II
ITEM 5- MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . .13
ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 14
ITEM 7- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 21
ITEM 8- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . .21
PART III
ITEM 9- DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION
16 (A) OF THE EXCHANGE ACT . . . . . . . . . . . . . . 22
ITEM 10- EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . 26
ITEM 11- SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 12- CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . .30
ITEM 13- EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . .31
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PART I
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ITEM 1 - BUSINESS
CoreCare Systems, Inc. (Ticker Symbol CRCS) is a regional behavioral healthcare
provider operating in Southeastern Pennsylvania. The principal lines of business
of Corecare Systems, Inc. (together with its subsidiaries, the "Company") are:
(I) providing a comprehensive spectrum of behavioral health services,
(II) providing Clinical Drug Trial services to the Pharmaceutical industry
for drugs that treat central nervous system disorders , and
(III) generating rental income from its real estate assets.
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. The Company conducts its operations from
two facilities in Bucks and Philadelphia Counties. The corporate office is
located on the site of the Company's largest asset, Kirkbride Center in
Philadelphia, Pennsylvania.
The Company selectively seeks opportunities to expand its base of operations
through synergistic evolution of complimentary services and by acquiring
additional facilities and /or entities to its existing behavioral care platform.
Significant planning efforts are being dedicated to growth opportunities in the
clinical drug trial arena through integration into existing behavioral services
as well as network affiliation, joint ventures, and management. The Company does
intend to seek acquisitions of small clinical drug research services companies.
The Company does intend to maximize the profitability of its real estate assets
through leasing, land sales, construction, and development of commercial space.
Recent Development Activities
The Company has restructured its business operations to focus on and expand
those services which are profitable such as its rehabilitation programs, rental
income, and clinical drug trial services. In 1999 and early 2000 the Company
closed, sold, and sharply contracted those unprofitable activities which should
reduce future operating losses. The Company has substantially reduced its
overhead costs over the past 12 months and will continue to do so in the future.
The remaining operations of the Company have demonstrated improved performance
as result of closing facilities and elimination of related expenditures. As a
result of management's efforts to eliminate and reduce unnecessary expenditures,
the Company has improved its operating results.
The Company believes it has the resources and ability to resolve its liquidity
problems. The Company's plan to improve its operating results will continue to
be multi-pronged. The Company will move to improve operating cash flow by
improving its revenue base and lowering expenses. Currently the Company has
received approval to open two outpatient clinics and is seeking to expand its
Drug & Alcohol (D&A) Rehabilitation and Residential Treatment programs, though
such approval cannot be guaranteed. The Company will continue to examine and
reduce the costs for operating systems and overhead especially as they relate to
lowering bad debt. Certain Medicare Reimbursement changes to the Company's
partial hospitalization and outpatient clinics took effect on August 1, 2000 and
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are expected to improve the profitability of these programs. Additionally, the
company has entered into agreements for the sale of certain non-operating
surplus real estate which will provide liquidity. Finally, the company is in
the process of obtaining alternate sources of financing given the improving
appraised value of the Companies properties. Within the year the Kirkbride
Center received an appraisal at $22,000,000 and the Westmeade Center was
appraised for $5,000,000. The Company has applied for HUD financing for
Westmeade Healthcare, Inc. which will provide the financing to pay down
significant liabilities of approximately $1,300,000 while lowering annual
interest charges. There is no guarantee that the Company will be successful in
this regard. The Company believes however that it will be able to refinance its
short and long term liabilities to generate additional liquidity and lower
interest charges.
In 1999, the Company proceeded with a plan to restructure the company to focus
on core revenue and profit making opportunities:
- In September 1999 the Company sold a one acre parcel of surplus land
at the Kirkbride Campus.
- The Company also sold certain assets of its Physician Practice
Management Practice. At this time the remainder of the Physician
Practice Management Practice has been consolidated into the Behavioral
Services Business Unit. The associated office lease was terminated and
remaining assets relocated to Kirkbride Center.
- In March 2000, the Company sold certain assets of its Health and
Fitness Operation and ceased all operations of that unit.
- In July 2000, the Company entered into an agreement for the sale of
the Lakewood property which will satisfy the obligations owed to the
debtors of that property.
- In January 2000 the Company signed an agreement to sell 4 acres to a
development concern; in August 2000 the agreement was amended to
include an additional 4.7 acres.
The Company will continue to evaluate business lines, payor contracts, as well
as outsourcing or contracting relationships which would further overall
profitability.
DESCRIPTION OF LINES OF BUSINESS
The Company is involved in continual development activities with respect to its
three primary lines of business.
Behavioral Health Services
The Company has undertaken a development plan to create behavioral
healthcare services which provides a continuum of care through a broad
range of acute, step-down, and outpatient services in Southeastern
Pennsylvania. Growth in this sector will occur primarily through the
start-up of newly licensed services rather than acquisition. Targeted
service areas include substance abuse, geriatric services and
adolescent services.
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Clinical Trial Services
The Company continuously seeks to grow the business through a
combination of internal initiatives combined with exploring external
opportunities such as joint ventures and acquisitions. Historically
this sector increased revenues by expanding the number of contracts
with Contract Research Organizations. Growth in the future will focus
on acquisitions of other similar companies.
Real Estate Leasing and Development
The Company seeks to maximize the value of its real estate holdings by
putting these assets to their highest and best use. This strategy
includes leasing certain assets to third parties as well as
periodically the sale of certain assets.
(I) Behavioral Health Services:
At the present time, the Company provides services in the following
categories:
(A) Acute Inpatient Hospitalization;
(B) Partial Hospitalization Services;
(C) Outpatient Care;
(D) Drug and Alcohol Rehabilitation Services;
(E) Wrap-around Services;
(F) Non-hospital acute residential psychiatric services to
adolescent patients
The Company provides these services at its two primary sites:
- The Kirkbride Center located in West Philadelphia, PA
- The Westmeade Center at Warwick located in Hartsville, PA
The Kirkbride Center's primary market is West and North Philadelphia. While
certified to provide services to Medicare, Medicaid and Blue Cross recipients,
the facility's primary payor is Community Behavioral Health (CBH).
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 and health
insurance companies; however, the most significant payors are Community
Behavioral Health, Americhoice and Medicaid.
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Bed Utilization and Occupancy Rates
The following table shows the historical bed utilization and occupancy rates for
the facilities (Warwick & Kirkbride Centers) operated by the Company for the
years indicated. Accordingly, information related to the Kirkbride Center
acquired during 1997 has been included from its respective date of acquisition
(February 27, 1997).
1999 1998 1997
------- ------- -------
Average Licensed Beds:
Acute Care Hospital 120 120 120
Step Down Units 105 74 32
--- --- ----
Total 225 194 152
Average Available Beds (1):
Acute Care Hospital 94 94 46
Step Down Units 105 74 32
--- ------ --
Total 199 168 78
Admissions:
Acute Care Hospital 4,638 3,129 1,393
Step Down Units 702 171 15
----- ------ -----
Total 5,340 3,300 1,408
Average Length of Stay (Days):
Acute Care Hospital 8.42 9.57 9.01
Step Down Units 50.94 80.47 283.47
Total 17.59 13.25 11.93
Patient Days(2):
Acute Care Hospital 58,180 29,959 12,543
Step Down Units 35,762 13,761 4,252
------ ------ ------
Total 93,942 43,720 16,795
Occupancy Rate--Licensed Beds(3):
Acute Care Hospital 77% 68% 29%
Step Down Units 93% 69% 36%
Total 85% 69% 30%
Occupancy Rate--Available Beds(3):
Acute Care Hospital 98% 87% 75%
Step Down Units 93% 69% 36%
Total 96% 79% 59%
(1) "Average Available Beds" is the number of beds which are actually in
service at any given time for immediate patient use with the necessary
equipment and staff available for patient care. A hospital may have
appropriate licenses for more beds than are in service for a number of
reasons, including lack of demand, incomplete construction, and
anticipation of future needs.
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(2) "Patient Days" is the aggregate sum for all patients of the number of days
that hospital care is provided to each patient.
(3) "Occupancy Rate" is calculated by dividing average patient days (total
patient days divided by the total number of days in the period) by the
number of average beds, either available or licensed.
(4) Step Down Services include the Drug and Alcohol Rehabilitation Beds and the
Residential Treatment Beds.
The operating statistics for 1999 and 1998 demonstrate the start up nature of
the Kirkbride Center. This facility was acquired on February 27, 1997 with a
census of 15 patients. The Company focused on improving the census in the acute
inpatient hospital beds while developing new services for this site. The Company
opened a D&A Rehabilitation unit in July 1998, which initially had 20 beds and
has been increased to 80 beds presently.
The Company has achieved significant growth in providing geriatric services.
Operations at the Philadelphia Nursing Home and the Philadelphia Geriatric
Center are the result of Kirkbride's affiliation with the Temple University
Healthcare System. Two licenses for outpatient clinics at the Philadelphia
Geriatric Center and Cambridge Assisted Living Facility were recently awarded
and these sites are expected to be operational by January 2001.
The Company determined that the acute inpatient license was producing
significant losses. These losses were caused by low reimbursement rates from CBH
for acute services and sub-acute services, as well as, County Funded patients.
These reimbursement rates were below the Company's Cost of providing the
services for those patients. As a result, the Company reduced acute care
operations starting in October 1999. The Company is currently operating 49 acute
inpatient hospital beds.
The Company believes that D&A Rehabilitation program and adolescent treatment
services warrant expansion.
The number of patient days of a hospital is affected by a number of factors,
including the number of physicians using the hospital, changes in the number of
beds, the composition and size of the population of the community in which the
hospital is located, general and local economic conditions, variations in local
medical and behavioral practices and the degree of outpatient use of the
hospital services. Current industry trends in utilization and occupancy have
been significantly affected by changes in reimbursement policies of third party
payors. A continuation of such industry trends could have a material adverse
impact upon the Company's future operating performance. The Company has
experienced growth in outpatient utilization over the past several years. The
Company is unable to predict the rate of growth and resulting impact on the
Company's future revenues because it is dependent upon developments in
physician practice patterns, which are outside of the Company's control. The
Company is also unable to predict the extent to which other industry trends will
continue or accelerate.
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SOURCES OF REVENUE
Behavioral Health Services
The Company receives payment for services rendered from private insurers,
including managed care plans, the federal government under the Medicare program,
state governments under its respective Medicaid programs and directly from
patients. The Company's behavioral health services are certified as providers of
Medicare and Medicaid services by the appropriate governmental authorities. The
requirements for certification are subject to change, and, in order to remain
qualified for such programs, it may be necessary for the Company to make changes
from time to time in its facilities, equipment, personnel and services. The
costs for recertification are not material as many of the requirements for
recertification are integrated with the Company's internal quality control
processes. If a facility loses certification, it will be unable to receive
payment for patients under the Medicare or Medicaid programs. Although the
Company intends to continue in such programs, there is no assurance that it will
continue to qualify for participation.
The sources of the Company's hospital revenues are charges related to the
services provided by the hospitals and their staffs, such as pharmacy,
psychotherapy and laboratory procedures, and basic charges for the hospital room
and related services such as general nursing care, meals, maintenance and
housekeeping. Hospital revenues depend upon the occupancy for inpatient routine
services, the extent to which ancillary services and therapy programs are
ordered by physicians and provided to patients, the volume of outpatient
procedures and the charges or negotiated payment rates for such services.
Charges and reimbursement rates for inpatient routine services vary depending on
the type of bed occupied (e.g., Acute, subacute, and 23 hour bed).
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.
The following table shows approximate percentages of net patient revenue derived
by the Company's facilities owned as of December 31, 1999 since their respective
dates of acquisition by the Company from third party sources, including the
additional Medicaid reimbursements.
PERCENTAGE OF NET PATIENT REVENUES
----------------------------
1999 1998 1997
---- ---- ----
Third Party Payors:
Medicare . . . . . . . . . . . . . 17% 21% 21%
Community Behavioral Health (CBH) 60% 61% 37%
Managed Care (a) . . . . . . . . 17% 9% 16%
Medicaid . . . . . . . . . . . . . 5% 8% 23%
Other Sources . . . . . . . . . . 1% 1% 3%
---- ---- ----
Total . . . . . . . . . . . . . . 100% 100% 100%
(a) Includes health maintenance organizations and preferred provider
organizations.
Regulation and Other Factors:
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Within the statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under either or both of such programs
and reimbursement is subject to audit and review by third party payors.
Management believes that adequate provision has been made for any adjustments
that might result therefrom. The Federal government makes payments to
participating hospitals under its Medicare program based on various formulas.
Behavioral health facilities are cost reimbursed by the Medicare program, but
are subject to a per discharge ceiling, calculated based on an annual allowable
rate of increase over the hospital's base year amount under the Medicare law and
regulations. Capital related costs are exempt from this limitation. In the
Balanced Budget Act of 1997, Congress significantly revised the Medicare payment
provisions for Prospective Payment System("PPS")- excluded hospitals, including
psychiatric hospitals. Effective for Medicare cost reporting periods beginning
on or after August 1, 1997, different caps are applied to psychiatric hospitals'
target amounts depending on whether a hospital was excluded from PPS before or
after that date. Congress also revised the rate-of-increase percentages for
PPS-excluded hospitals and eliminated the new provider PPS-exemption for
psychiatric hospitals. In addition, the Health Care Financing Administration has
implemented requirements applicable to psychiatric hospitals that share a
facility or campus.
The Balanced Budget Act of 1997 called for the government to trim the growth of
federal spending on Medicare by $115 billion and on Medicaid by $13 billion over
the next five years. The act also calls for reductions in the future rate of
increases to payments made to hospitals and reduces the amount of reimbursement
for outpatient services, bad debt expense and capital costs. It is possible that
future budgets will contain certain further reductions in the rate of increase
of Medicare and Medicaid spending. In addition to Federal health reform efforts,
several states have adopted or are considering healthcare reform legislation.
Several states are planning to consider wider use of managed care for their
Medicaid populations and providing coverage for some people who presently are
uninsured. The enactment of Medicaid managed care initiatives is designed to
provide low-cost coverage.
All hospitals are subject to compliance with various federal, state and local
statutes and regulations and receive periodic inspection by state licensing
agencies to review standards of medical care, equipment and cleanliness. The
Company's hospitals must comply with the conditions of participation and
licensing requirements of federal, state and local health agencies, as well as
the requirements of municipal building codes, health codes and local fire
departments. In granting and renewing licenses, a department of health
considers, among other things, the physical buildings and equipment, the
qualifications of the administrative personnel and nursing staff, the quality of
care and continuing compliance with the laws and regulations relating to the
operation of the facilities.
State licensing of facilities is a prerequisite to certification under the
Medicare and Medicaid programs. Various other licenses and permits are also
required in order to dispense narcotics, operate pharmacies, handle controlled
substances and operate certain equipment. All the Company's eligible hospitals
have been accredited by the Joint Commission on the Accreditation of Healthcare
Organizations ("JCAHO"). The JCAHO reviews each hospital's accreditation once
every three years. The review period generally ranges from once a year to once
every three years. The Social Security Act and regulations thereunder contain
numerous provisions which affect the scope of Medicare coverage and the basis
for reimbursement of Medicare providers. Among other things, this law provides
that in states which have executed an agreement with the Secretary of the
Department of Health and Human Services (the "Secretary"), Medicare
reimbursement may be denied with respect to depreciation, interest on borrowed
funds and other expenses in connection with capital expenditures which have not
received prior approval by a designated state health planning agency.
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The Company has not experienced and does not expect to experience any material
adverse effects from those requirements. These provisions govern the
distribution of healthcare services, the number of new and replacement hospital
beds, administration as required state CON laws, contain healthcare costs, and
meet the priorities established therein. Significant CON reforms have been
proposed in a number of states, including increases in the capital spending
thresholds and exemptions of various services from review requirements. The
Company is unable to predict the impact of these changes upon its operations.
The Company's healthcare operations generate medical waste that must be disposed
of in compliance with federal, state and local environmental laws, rules and
regulations. In 1988, Congress passed the Medical Waste Tracking Act. Infectious
waste generators, including hospitals, now face substantial penalties for
improper arrangements regarding disposal of medical waste, including civil
penalties of up to $25,000 per day of noncompliance, criminal penalties of
$150,000 per day, imprisonment, and remedial costs. The comprehensive
legislation establishes programs for medical waste treatment and disposal in
designated states. The legislation also provides for sweeping inspection
authority in the Environmental Protection Agency, including monitoring and
testing. The Company believes that its disposal of such wastes is in compliance
with all state and federal laws.
Medical Staff and Employees
The Company's facilities are staffed by licensed physicians who have been
admitted to the medical staff of individual facilities. With a few exceptions,
physicians are employees of the Company's facilities and members of the medical
staff. These physicians also serve on the medical staff of facilities not owned
by the Company and may terminate their affiliation with the Company's facilities
at any time. Each of the Company's facilities is managed on a day-to-day basis
by a managing director employed by the Company.
Competition
In all geographical areas in which the Company operates, there are other
facilities which provide services comparable to those offered by the Company's
facilities, some of which are owned by governmental agencies and supported by
tax revenues, and others of which are owned by nonprofit corporations and may be
supported to a large extent by endowments and charitable contributions. Such
support is not available to the Company's facilities. Certain of the Company's
competitors have greater financial resources, are better equipped and offer a
broader range of services than the Company. In recent years, competition among
healthcare providers for patients has intensified as hospital occupancy rates in
the United States have declined due to, among other things, regulatory and
technological changes, increasing use of managed care payment systems, cost
containment pressures, a shift toward outpatient treatment and an increasing
supply of physicians. The Company's strategies are designed, and management
believes that its facilities are positioned, to be competitive under these
changing circumstances.
Liability Insurance
The Company's subsidiaries are covered under commercial insurance policies which
provide for professional and general liability claims for all of its
subsidiaries up to $1 million per occurrence, with an average annual aggregate
for covered subsidiaries of $6 million through 2001. These subsidiaries maintain
excess coverage up to $30 million with major insurance carriers.
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II. CLINICAL RESEARCH TRIAL SERVICES
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"). Quantum contracts with its related subsidiaries or
other non-related third party companies to conduct clinical trials. Quantum
provides investigative services for the pharmaceutical and contract research
organizations in the area of psychiatric and neurological clinical trials.
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 $2.4 billion in 1999. 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 an 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. 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.
The company intends to provide services on products to treat diseases of the
Central Nervous System and Geriatric population. There are 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, III, and IV trials of
new drugs.
Quantum's Market: The United States, as well as internationally based
pharmaceutical companies, are seeking appropriate clinical trial sites for
the testing of their drugs.
III. REAL ESTATE DEVELOPMENT AND LEASING ACTIVITIES
Kirkbride Real Estate Leasing Activities
The Kirkbride Center consists of seven (7) buildings totaling 422,800
square feet on a 26-acre site comprising an entire city block bounded by Market
Street, Haverford Avenue, and 48th and 49th Streets in Philadelphia,
Pennsylvania.
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.
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To provide for an orderly development program, the Company created a new
subsidiary, CoreCare Realty Corporation to assume responsibility for development
of the Kirkbride Center.
In September 1999 the Company sold one surplus acre at the Kirkbride
Center.
In January 2000 the Company signed an agreement to sell 4 acres to a
development concern; in August 2000 the agreement was amended to include an
additional 4.7 acres. The sale will require the partial demolition of the
oldest building at Kirkbride.
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As of December 31, 1999, Kirkbride Center had 376,283 square feet of leaseable
space. This space was utilized as follows:
Square Feet %
CoreCare Entities 141,800 38
Third - Party Tenants 84,036 22
Empty Space (1) 150,447 40
------- --
Total 376,283 100
Subsequent to December 31, 1999 Childrens Hospital reduced its space lease from
47,115 square feet to 9,300 square feet for a lease termination fee of $430,000.
(1) The Company also started downsizing its acute inpatient hospital space
in October 1999, March 2000 and April 2000. By November 2000, the Company had
negotiated leases for the space that had been vacated by the Hospital
downsizing.
ITEM 2 - PROPERTIES
The Company owns or leases the following properties.
PROPERTY LOCATION OWN / LEASE DESCRIPTION
-------------------- ---------------- ----------- ------------------------
Kirkbride Center Philadelphia, PA Own 422,800 square feet on
26 acres
-------------------- ---------------- ----------- ------------------------
Westmeade at Warwick Hartsville, PA Own 14,000 square feet on 11
acres
-------------------- ---------------- ----------- ------------------------
Wayne Office Wayne, PA Lease 5,449 square feet; Lease
expired 7/31/2000
-------------------- ---------------- ----------- ------------------------
Lakewood Stroudsburg, PA Own Approximately 61 acres;
held for sale
-------------------- ---------------- ----------- ------------------------
The Company believes its facilities are adequate for its operating needs for
the foreseeable future.
ITEM 3 - LEGAL PROCEEDINGS
The Company is subject to claims and lawsuits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's hospitals and is party to various other litigation. However,
management believes the ultimate resolution of these pending proceedings will
not have a material adverse effect on the Company.
The Company is subject to numerous lawsuits from creditors for amounts due for
services rendered and products delivered. In most cases, the Company has accrued
the amount of these claims on its financial statements. The Company is
attempting to work out payment plans with most of these creditors.
On October 18, 2000, The City of Philadelphia sued the Company in the Court of
Common Pleas of Philadelphia County, Pennsylvania for unpaid wage taxes for the
period February 1997 through March 2000. The amount sought by the City is
approximately $1.5 million, which includes approximately $600,000 of interest
and penalties. The Company's financial statements includes provisions for this
claim in the amount of approximately $1,000,000. The Company is currently
negotiating the abatement of all interest and penalties.
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ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Inapplicable. No matter was submitted during the fiscal year ended December 31,
1999 to a vote of security holders.
PART II
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ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
(A) MARKET INFORMATION:
-------------------
The Company's Common Stock is traded on the pink sheets under the symbol
"CRCS." The following table sets forth the closing high and low bid prices
quoted for the Company's Common Stock since January 1, 1998. The Company's stock
was taken off the over-the-counter electronic bulletin board operated by the
National Association of Securities Dealers on November 12, 1999.
CALENDAR
YEAR 1998
---------
First Quarter $1.031 $0.812
Second Quarter $1.960 $0.960
Third Quarter $1.250 $0.750
Fourth Quarter $1.438 $0.625
CALENDAR
YEAR 1999
---------
First Quarter $1.030 $0.594
Second Quarter $0.594 $0.375
Third Quarter $0.375 $0.219
Fourth Quarter $0.500 $0.078
(B) HOLDERS:
--------
As of December 31, 1999 there were approximately 621 record holders of the
Company's Common Stock.
(C) 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
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. No underwriters were involved in any of the following
transactions.
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Shares issued for Services - 1999
The Company issued a total of 30,000 shares of restricted Common Stock to
AmCare International, Inc. on May 4, 1999 for consulting and other services
rendered in 1997 and 1998 totaling $10,200. The shares of Common Stock issued
to AmCare International, Inc. 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. The Company relied
on Section 4(2) in this transaction based on the sophistication of AmCare and
its principals in the Company's industry and the lack of public solicitation for
this transaction.
The Company committed to issuing 300,000 shares restricted Common Stock to
three vendors that had provided consulting, rental of real estate and other
services rendered in 1997 and 1998. The Company will issue these shares as
additional compensation for late payment of these services. The Company
recorded an expense of $37,500 in the year ended December31, 1999 regarding
these shares. The shares of Common Stock to be issued will be 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.
1999 - Shares Issued to Employees Under Company 1996 Stock Plan
Out of the shares reserved for issuance pursuant to the Company's 1996
Stock Plan and amended in October 1998, during the year ended December 31, 1999
the Company issued a total of 41,500 shares of Common Stock to a total of 5
employees of the Company. Additionally, during the year the Company committed
312,600 shares to 31 employees which have been or will be issued in 2000. 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. The Company relied
on Section 4(2) in these transactions as the employees had positions in the
Company which enabled them access to the information regarding the Company which
they would have received in a registration.
Additionally, the Company committed to issuing 50,000 shares of restricted
Common Stock to one employee in exchange for the cancellation of the employee's
option to acquire 50,000 shares of Common Stock. The Company recorded a charge
of $6,250 in the year ended December 31, 1999. The shares of Common Stock to be
issued will be 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.
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1999 - Notes and Shares Issued
Between October 1999 and December 1999, in separately negotiated
transactions, the Company borrowed a total of $700,000 from four individuals,
accredited investors, for a term of two years from the date of investment. The
debts were evidenced by Promissory Notes bearing interest at 20% per annum. In
addition, the investors received 150,000 shares of restricted shares of the
Company's Common Stock. None of the investors were previously or are currently
affiliated with the Company. The transactions with the lenders were exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act as the investors were accredited investors and had access to the information
which they would have received in a registration statement. The shares of
Common Stock issued to the lender 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.
1999 - Conversion of Series E Convertible Preferred Stock
The holders of Series E Convertible Preferred Stock exercised their rights
to convert the outstanding stock in the year ended 1998. The conversion was
reported in 1998 and the Company issued 1,192,046 unrestricted shares of Common
Stock in 1999.
ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The matters discussed in this report as well as the news releases issued from
time to time by the Company include certain statements containing the words
"believes", "anticipates", "intends", "expects" and words of similar import,
which constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the following: that the majority of the
Company's revenues are produced by a small number of its total facilities;
possible changes in the levels and terms of reimbursement by government
programs, including Medicare or Medicaid or other third party payors; industry
capacity; demographic changes; existing laws and government regulations and
changes in or failure to comply with laws and governmental regulations; the
ability to enter into managed care provider agreements on acceptable terms;
liability and other claims asserted against the Company; competition; the loss
of significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for healthcare; the ability
to attract and retain qualified personnel, including physicians; the ability of
the Company to successfully integrate its acquisitions; the Company's ability to
finance growth on favorable terms; and, other factors referenced in the
Company's 1999 Form 10-KSB or herein. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
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The following discussion should be read in conjunction with the Company's
financial statements and notes thereto.
Continuing Operations
The Company has incurred accumulated losses of approximately $37 million (since
inception) which has resulted in a negative working capital balance of
approximately $30.9 million and Shareholder's Deficiency of approximately $20
million at December 31, 1999. These conditions have raised concerns about the
Company's ability to continue as a going concern. The Company believes that it
will continue to operate for the foreseeable future as explained below.
Earnings before interest, income taxes, depreciation, amortization, impaired
asset write down expense, and nonrecurring gains on sale of assets recorded
("EBITDAR") improved to $(1.6) million in 1999 from $(3.4) million in 1998. The
improved performance of 1999 compared to 1998 was the result of refocusing of
the business which occurred in the latter half of 1999.
The Company has focused its business operations on expanding those services
which are profitable such as its rehabilitation programs, residential treatment
services, outpatient services, rental income, and clinical drug trial services.
In 1999 and early 2000 the Company closed, sold, and sharply contracted those
activities which accounted for significant historical losses. The Company has
substantially reduced its overhead costs over the past 12-month period ending
June 2000 and will continue to do so in the future. The remaining operations of
the Company have demonstrated improved performance as a result of closing
facilities and elimination of related expenditures. As a result of these changes
the Company has improved its operating results.
The Company believes it has the resources and ability to resolve its liquidity
problems. The Company has entered into agreements for the sale of certain
non-operating surplus real estate which will provide liquidity. The Company is
finally in the process of obtaining alternate sources of financing and believes
it will be able to refinance short term liabilities on a favorable long term
basis and generate additional liquidity.
Restatement for 1998 and 1997
In connection with preparation of the December 31, 1999 financial statements,
the Company discovered that the financial statements for the years ended
December 31, 1998 and December 31, 1997 had not properly accounted for and
reflected certain transactions and events in accordance with generally accepted
accounting principles. It was determined that a restatement of the financial
statements was necessary and appropriate due primarily to the following items:
- Capitalization of certain operating expenses
- Unrecorded charges associated with the issuance of options and
warrants in connection with debt and services provided by
nonemployees
- Recording of obligations under capital lease
- Recording of reserves associated with accounts receivable
- Under-accrual of amounts due Medicare
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The notes to the financial statements include a comparative presentation of the
Consolidated Balance sheet and Consolidated Statement of Operations as
previously reported and restated for the years ended December 31, 1997 and
December 31, 1998.
The following discussion is based upon the restated results for the year ended
December 31, 1998.
Results of Operations
Net revenues increased 26.4% to $25.8 million in 1999 as compared to 1998
revenues of $20.4 million. The $5.4 million increase in net revenues during 1999
as compared to 1998 was due primarily to: (i) revenue growth in Patient Services
at acute care and behavioral health care facilities of $6.5 million; and (ii)
rental income increase of $0.1 million. These increases were partially offset by
declines in revenue in Management Services of $1.1 million and $0.1 million in
the Health and Fitness Center in 1999 as compared to 1998.
Direct Costs accounted for 44.1% and 49.0% of consolidated net revenues in 1999
and 1998, respectively demonstrating improving operating efficiency and the
implementation of cost saving strategies.
EBITDAR improved to $(1.6) million in 1999 from $(3.4) million in 1998. The
overall operating margins of EBITDAR as a percentage of revenue were (6.3)% in
1999, and (16.6)% in 1998. The factors that caused the improvement in the
Company's overall operating margins during the last year are discussed below.
Depreciation and amortization expense decreased $1.3 million to $1.5 million in
1999 and increased $1.6 million to $2.8 million in 1998. The decline was
primarily due deferred finance expenses associated with the WRH Mortgage on the
Kirkbride Center which were fully amortized in 1998 and therefore these expenses
were not present in 1999.
Interest expense increased to $3.3 million in 1999 from $2.9 million in 1998
due primarily to increased borrowings used to finance operations.
During the third quarter of 1999, the Company sold a surplus parcel of land at
the Kirkbride Center and realized a gain on the transaction which was partially
offset by the realization of a loss on the sale of certain assets related to its
anesthesia practice management business.
During 1999, the Company recorded a $0.5 million nonrecurring charge to reduce
the carrying value of the Lakewood Retreat real estate holdings to its estimated
realizable value of approximately $0.6 million. The Company is involved in
litigation with respect to this facility and may incur additional charges in the
event it is unable to close or sell the facility for a significant period of
time or suffers an unfavorable outcome from this litigation. In July 2000, the
Company signed an agreement for sale on the property for a sale price of $0.8
million. Although the liabilities exceed the sale price the Company is
optimistic that the mortgage holders will accept the available proceeds in
satisfaction of the debt. On October 30, 2000, the sale agreement closed in
escrow subject to certain documentation requirements.
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The Company's effective tax rate during 1999 and 1998 was 0.0%. The Company has
significant accumulated operating losses and believes it will not incur a
material income tax liability in the immediate future.
Net Patient Services
Net revenues from the Company's behavioral health services facilities accounted
for 91% and 83% of consolidated net revenues in 1999 and 1998, respectively. Net
revenues at the Company's behavioral health facilities increased 38.6% in 1999
as compared to 1998. Admissions and patient days at these facilities increased
62% and 134%, respectively, in 1999 as compared to 1998 and the average length
of stay increased to 17.6 days in 1999 as compared to 13.3 days in 1998.
The 33% increase in the average length of stay during 1999 as compared to 1998,
was primarily due to an increase in rehabilitation and adolescent patients,
which generally have longer lengths of stay than acute care for adults. Despite
the increase in the average length of stay during 1999 as compared to 1998,
there has been continued practice changes in the delivery of behavioral health
services and continued cost containment pressures from payors, including managed
care companies, which include a greater emphasis on the utilization of
outpatient services. Providers participating in managed care programs agree to
provide services to patients for a discount from established rates which
generally results in pricing concessions by the providers and lower margins.
Additionally, managed care companies generally encourage alternatives to
inpatient treatment. The Company expects the admission constraints and payor
pressure to continue.
The Company has limited ability to reduce many of the costs of providing care.
Each level of care requires certain staffing patterns as mandated by federal and
state regulations. The company must comply with the regulatory staffing
requirements and thereby has limited, if any ability, to manage these direct
costs. The Company has aggressively attempted to manage such situations to
improve the profitability of its operations, but also remain in compliance with
all regulatory and legal requirements to provide quality care to those in need
of it.
Gross Margins for Patient Services were 55.9% in 1999 and 47.5% in 1998. The
improvement in gross margin was due to revenue increase of 38.6% in 1999, which
was partially offset by increases in direct costs for Patient Services of 16.6%
in 1999. The net improvement in gross margin of 8.4% between 1999 and 1998 was
primarily due to improvements in utilization of staff combined with cost
reductions in services for patient care. Management continues to implement cost
controls in response to the managed care environment, however, pressure on
operating margins is expected to continue in the future.
Operating expenses (operating expenses, salaries and wages and provision for
doubtful accounts) as a percentage of net revenues at the Company's behavioral
health services facilities were 70.8% in 1999, 85.6% in 1998. The improvement of
14.8% between 1999 and 1998 reflect the staff reductions in administrative
departments combined with improvements in the management of costs for supplies
and outside services such as legal and insurance expenses, which were partially
offset by an increase in Bad Debt Expense. The increase in Bad Debt Expense of
$1.4 million was primarily due to the Company's decision to increase the
allowance for doubtful accounts associated with services provided in 1999. The
Company believes it billed for these services in an appropriate manner. The
payor initially rejected these claims for payment. The Company has appealed this
decision and awaits a resolution of the matter at this time.
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The operating losses can be attributed to certain managed care companies the
Company regularly deals with that have established reimbursement rates on
specific levels of care that are below the cost of providing that level of care.
Each level of care requires specific staffing patterns mandated by federal and
state regulations. The company must comply with the regulatory staffing
requirements and thereby has limited, if any, ability to manage these direct
costs. The company has implemented several cost reduction initiatives designed
to lower infrastructure and overhead costs. The Company has requested increases
in its reimbursement rates from payors to bring the rates in line with the costs
of providing services. To date, the Company has received some rate relief.
In late 1999, the Company initiated programs to improve revenue yield by
reducing beds provided to payors with unprofitable reimbursement rates. The
Company complied with all applicable regulations, laws, and contract terms as it
implemented this program. At the end of 1999 the Company followed up on this
program by reducing the number of acute care beds at its Kirkbride Facility from
120 licensed beds to 80. In early 2000 the company substantially reduced the
available beds to 49 beds for acute care as part of its drive to improve
profitability. The Company leased part of its unused capacity to third parties,
as described below in the real estate development discussion below.
D&A Rehabilitation and residential treatment programs remains a profitable line
of business with strong prospects for growth. The Company has received
preliminary approval to increase the licensed beds in its D&A rehabilitation
program from 80 to 100 beds and to increase the residential treatment beds from
32 to 49. Final approval and licensure on the additional residential beds is
expected in the fourth quarter, 2000 and the rehabilitation beds is expected in
the first quarter 2001.
The Company's facilities have experienced an increase in inpatient acuity and
intensity of services as less intensive services shift from an inpatient basis
to an outpatient basis due to pharmaceutical improvements and continued
pressures by payors, including Medicare, Medicaid and managed care companies to
reduce admissions and lengths of stay. To accommodate the increased utilization
of outpatient services, the Company has expanded or redesigned several of its
outpatient facilities and services. Gross outpatient revenues of the Company's
during the last three years increased 39% in 1999 as compared to 1998 and
comprised approximately 10% of the Company's gross patient revenue in each year.
Additionally, the hospital industry in the United States as well as the
Company's acute care facilities continue to have significant unused capacity
which has created substantial competition for patients. The Company expects the
increased competition, admission constraints and payor pressures to continue.
The increase in net revenue as discussed above was partially offset by lower
payments from the government under the Medicare program as a result of the
Balanced Budget Act of 1997 ("BBA-97") and increased discounts to insurance and
managed care companies (see General Trends for additional disclosure). The
Company anticipates that the percentage of its revenue from managed care
business will continue to increase in the future. The Company generally receives
lower payments per patient from managed care payors than it does from
traditional indemnity insurers. Recent changes in Medicare reimbursement
effective August, 2000 is expected to improve the profitability of the partial
hospital and outpatient clinic services.
REAL ESTATE DEVELOPMENT
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Net revenues increased 7.0% to $1.1 million in 1999 as compared to 1998. The
$0.1 million increase in net revenues during 1999 as compared to 1998 was due
primarily to an increase of space under lease at the Kirkbride Center.
The property at the Kirkbride Center is unique in many respects. Although the
facility is in area zoned for residential use, its history of providing multiple
commercial and institutional services over 150 years of continuous operations
has provided numerous exceptions to the zoning regulations. The Company believes
that this facility is well positioned to become a youth services center for
Philadelphia and the surrounding counties. The Kirkbride Center is one of a
handful of sites where these firms can operate without petitioning neighbors and
the city for a special exception to the zoning regulations.
The Company is actively marketing the facility to prospective tenants whose
rental income would be greater than income generated by the Company's use of the
space. For example in second quarter of 2000 the Company leased a floor to a
third party that it had previously been used to provide acute psychiatric care.
In the fourth quarter 2000 two additional floors were leased.
QUANTUM CLINICAL TRIAL SERVICES:
In 1999, Quantum completed its first full year of operations posting revenues of
$0.3 million. During its first year of operations, the Company began to
establish a track record of quality and reliable services to its clients. In
many of its trials the Company was in the top third of all sites providing
services.
Management Services
Net revenues declined 56.4% to $0.9 million in 1999 as compared to revenue of
$2.0 million in 1998. The $1.1 million decrease in net revenues during 1999 as
compared to 1998 was due primarily to: (i) reduction of the client base; and
(ii) reduction of rates charged due to intense competition. The Company decided
to exit this line of business by late 1999. It sold certain assets of the
Management Services in 1999. In the first quarter of 2000 it consolidated the
minor ongoing business with the infrastructure of CoreCare Behavioral Health
Management, Inc. subsidiary.
Health and Fitness
Net revenues declined 23.5% to $0.3 million in 1999 as compared to revenue of
$0.4 million in 1998. The $0.1 million decrease in net revenues during 1999 as
compared to 1998 was due primarily to a decline in the membership base. The
Company decided to exit this line of business by early 2000. It sold certain
assets of the Chestnut Health and Fitness Center in the first quarter of 2000,
and shortly thereafter ceased all operations.
General Trends
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid. The Medicare program reimburses the
Company's by cost based formula for behavioral health facilities. Historically,
rates paid under Medicare's PPS for inpatient services have increased, however,
these increases have been less than cost increases. Pursuant to the terms of
BBA-97, there were no increases in the rates paid to hospitals for inpatient
care through September 30, 1998 and reimbursement for bad debt expense and
capital costs as well as other items have been reduced.
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Inpatient operating payment rates were increased 1.1% for the period of January
1, 1999 through December 31, 1999, however, the modest increase was less than
inflation and is expected to be more than offset by the negative impact of
increasing the qualification threshold for additional payments for treating
costly inpatient cases. As of January 1, 2000 the Company did receive rate
increases from Community Behavioral Health of 7% on its rehabilitation services;
further on July 1, 2000 increases of 5% and 10% were received on its acute and
subacute hospital services, respectively.
Payments for Medicare outpatient services historically have been paid based on
costs, subject to certain adjustments and limits. BBA-97 requires that payment
for those services be converted to PPS. The Health Care Financing
Administration's implemented PPS for outpatients effective August 1, 2000.
The Company considers the change to have a positive impact on profitability.
The healthcare industry is subject to numerous laws and regulations which
include, among other things, matters such as government healthcare participation
requirements, various licensure and accreditation, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Government action has
increased with respect to investigations and/or allegations concerning possible
violations of fraud and abuse and false claims statutes and/or regulations by
healthcare providers. Providers that are found to have violated these laws and
regulations may be excluded from participating in government healthcare
programs, subjected to fines or penalties or required to repay amounts received
from government for previously billed patient services. While management of the
Company believes its policies, procedures and practices comply with governmental
regulations, no assurance can be given that the Company will not be subjected to
governmental inquiries or actions.
In addition to the Medicare and Medicaid programs, other payors, including
managed care companies, continue to actively negotiate the amounts they will pay
for services performed. Approximately 32% in 1999 and 27% in 1998 of the
Company's net patient revenues were generated from managed care companies, which
includes health maintenance organizations and preferred provider organizations.
In general, the Company expects the percentage of its business from managed care
programs to continue to grow. The consequent growth in managed care networks and
the resulting impact of these networks on the operating results of the Company's
facilities vary among the markets in which the Company operates.
Effects of Inflation and Seasonality
The healthcare industry is very labor intensive and salaries and benefits are
subject to inflationary pressures as are rising supply costs which tend to
escalate as vendors pass on the rising costs through price increases. Inflation
has not had a material impact on the results of operations over the last three
years. Although the Company cannot predict its ability to continue to cover
future cost increases, management believes that through adherence to cost
containment policies, labor management and reasonable price increases, the
effects of inflation on future operating margins should be manageable. However,
the Company's ability to pass on these increased costs associated with providing
healthcare to Medicare and Medicaid patients is limited due to various federal,
state and local laws which have been enacted that, in certain cases, limit the
Company's ability to increase prices. In addition, as a result of increasing
regulatory and competitive pressures and a continuing industry wide shift of
patients into managed care plans, the Company's ability to maintain margins
through price increases to non-Medicare patients is limited.
The Company's business is seasonal, with higher patient volumes and net patient
service revenue in the first and fourth quarters of the Company's year. This
seasonality occurs because, generally, more people become ill during the fall
and winter months, which results in significant increases in the number of
patients treated in the Company's facilities during those months.
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Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in footnote 1 to
the consolidated financial statements, the Company's working capital, as of
December 31, 1999, was a deficit of $(30.9) million which represents an increase
of $3.7 million in the deficit from $(27.2) million as of December 31, 1998. The
increase in the deficit was primarily caused by the increase in current
liabilities of $4.5 million, a portion of which is attributable to the loss in
1999. The Company has incurred accumulated losses of approximately $37 million
(since inception) which has resulted in a Shareholder's Deficiency of
approximately $20 million at December 31, 1999. These conditions have raised
concerns about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company believes that it
will continue to operate for the foreseeable future as explained above.
The working capital deficit is a severe challenge for the company. The Company
believes it has the resources and ability to resolve its liquidity problems.
The Company has entered into agreements for the sale of certain non-operating
surplus real estate which will provide liquidity. The Company is in the process
of obtaining alternate sources of financing and believes it will be able to
refinance short term liabilities on a favorable long term basis and generate
additional liquidity.
Net cash used in operating activities was $(0.3) million in 1999 and $(2.3)
million in 1998. The $2.0 million increase in 1999 as compared to 1998 was
primarily attributable to: (i) a $3.0. million decrease in net loss, primarily
resulting from restructuring described above, plus the addback of depreciation,
amortization, and impaired asset writedown expenses; (ii) a $1.7 million
unfavorable change in accounts receivable, partially resulting from delays in
payments by managed care payors; and, (iii) a net increase of liabilities of
$1.6 million.
During 1999, the Company received total cash proceeds of approximately $0.6
million generated primarily from the sale of the real property of non-operating
surplus land ($0.5 million). The net gain/loss resulting from these transactions
did not have a material impact on the 1999 results of operations.
During the first quarter of 1998, the Company acquired the assets of Preferred
Medical Services for a purchase price of $0.3 million. The assets were
incorporated into the operations of the Company's Management Services unit,
doing business as CMI Incorporated ("CMI"). CMI was focused on providing
administrative and billing services to physician practices.
Capital expenditures, net of proceeds received from sale or disposition of
assets were $0.4 million in 1999 (including $0.5 million of cash proceeds
generated primarily from the sale of non-operating surplus land and other assets
as mentioned above), and $(5.0) million in 1998. Capital expenditures for
capital equipment, renovations and new projects at existing hospitals and
completion of major construction projects in progress at December 31, 1999 are
expected to total approximately $0.3 million in 2000. The Company believes that
its capital expenditure program is adequate to expand, improve and equip its
existing hospitals.
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As of December 31, 1999, the Company had $2 million of unused borrowing capacity
under the terms of its $5 million revolving credit line agreement. A large
portion of the Company's accounts receivable are pledged as collateral to secure
this program. Those accounts receivable for billed patient services which are
less than 150 days old are eligible collateral under this facility. A majority
of the Company's accounts receivable have aged beyond 150 days and no longer
qualify as collateral.
This agreement provides for interest at the bank's prime rate plus 175 basis
points (10.25% at December 31, 1999). A facility fee ranging from 1/8% to 3/8%
is required on the total commitment. This program, which began in 1998, is
scheduled to expire or be renewed on January 15, 2001.
The Company does not expect to make any significant capital expenditures in the
foreseeable future and expects to finance all capital expenditures and
acquisitions with internally generated funds and borrowed funds. Additional
borrowed funds may be obtained either through refinancing the existing revolving
credit agreement, mortgages, or the issuance of long-term securities. The
Company believes that it has a reasonable basis to believe that it will
refinance a portion of its debt on a long term basis.
ITEM 7- Financial Statements and Supplementary Data
The Consolidated Financial Statements of Corecare Systems, Inc. required to be
submitted in response to Item 7 are set forth in Part III, in Item 13 of this
report.
ITEM 8- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 16, 1999 the Company informed the accounting
firm Shiffman Hughes and Brown, P.C. ("SHB") that the Company would not retain
it to audit the Company's financial statements for the year ended December 31,
1999. SHB had been the Company's principal accountants since the fiscal year
ended December 31, 1992. The report of SHB on the consolidated financial
statements of the Company for the two most recent fiscal years did not contain
an adverse opinion or a disclaimer of opinion, and was not qualified opinion or
modified as to uncertainty, audit scope, or accounting principles. The Company
has had no disagreements with its former principal accountants on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which disagreements, if not resolved to the satisfaction of
the former accountants, would have caused it to make reference to the subject
matter of disagreements in connection with its report relating to the audits for
fiscal years ended December 31, 1998 and 1997 or during the period from January
1, 1999 to September 16, 1999.
The Company's decision not to retain SHB was not based on the expectation that
any disagreement would arise in connection with the audit of its financial
statement for the year ended December 31, 1999. The decision not to retain SHB
was made by the Company's Board of Directors upon the recommendation of the
Audit Committee, and the belief that a larger nationwide firm would more able to
service the Company in the future.
On February 5, 2000 the Company engaged the accounting firm of BDO Seidman, LLP
as its principal accountants.
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PART III
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ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
As of November 2000, the directors, executive officers, and senior managers
of the Company are as follows:
DIRECTORS & OFFICERS:
NAME AGE POSITION
Thomas T. Fleming 74 Chairman of the Board of
Directors and CEO
Rose S. DiOttavio 50 President, Treasurer and a Director
Thomas X. Flaherty 39 Director
George P. Stasen 54 Director
Charles A. Burton 54 Director
Mark Novitsky, M.D. 46 Senior Vice President &
Corporate Medical Director
SENIOR MANAGERS:
NAME POSITION
Fred Baurer, M.D. 43 Senior Vice President &
Medical Director, Kirkbride Center
Jeff Friedman, Ph.D., L.S.W. 45 Clinical Director of Westmeade
at Warwick
Erwin A. Carner, Ed.D., MSW 57 Sr. Director of Geriatric
Continuum
Dennis Fontana 31 Director of Management Information
Systems
Gardner Kahoe 50 General Counsel and Corporate
Secretary
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified. No director received any
compensation for serving as a director.
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BOARD OF DIRECTORS:
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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.
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.
26
<PAGE>
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.
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.
27
<PAGE>
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 B.A. 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:
---------------------------
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 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.
ITEM 10 - EXECUTIVE COMPENSATION
(a) GENERAL:
--------
28
<PAGE>
For the fiscal year ended December 31, 1997 the Company's Chief Executive
Officer and President did not receive 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, during this period, the Company charged operations with $144,000 in
1997, or $72,000 for each, which was accrued and a like amount credited to paid
in capital. Mr. Fleming and Ms. DiOttavio have each received annual salaries of
$156,000 commencing March 1998, and paid currently, which salaries the company
believes are below industry standards.
(b) SUMMARY COMPENSATION TABLE:
-----------------------------
The following summary compensation table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Company's Chief Executive Officer and the next four most highly
compensated executive officers during the years ended December 31, 1999, 1998,
and 1997, respectively.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
1999 ANNUAL COMPENSATION
Restricted Securities
----------- ----------
All Other Annual Stock Underlying
----------- ----------
Name and Principal Position Salary Bonus ($) Compensation (Shares) Options
---------------------------------- -------- --------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Thomas Fleming, Chairman
Of the Board and Chief Executive
Officer
1999 $156,000 -0- $ 9,434 (1) -0- -0-
1998 134,000 -0- 6,758 (1) -0- -0-
1997 72,000 -0- -0- -0- -0-
---------------------------------- -------- --------- ------------------ ----------- ----------
Rose S. DiOttavio, President
1999 $156,000 -0- -0- -0- -0-
1998 134,000 -0- -0- -0- -0-
1997 72,000 -0- -0- -0- -0-
---------------------------------- -------- --------- ------------------ ----------- ----------
Mark Novitsky, Senior Vice
President
1999 $244,005 -0- -0- 50,000 525
1998 81,245 -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0-
---------------------------------- -------- --------- ------------------ ----------- ----------
Fred Bauer, Senior Vice President
1999 $180,003 -0- -0- 50,000 263
1998 172,000 -0- -0- -0- -0-
1997 146,000 -0- -0- -0- -0-
---------------------------------- -------- --------- ------------------ ----------- ----------
29
<PAGE>
Sharon Irwin, Vice President (2)
1999 $ 78,206 -0- -0- 50,000 368
1998 38,798 -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0-
---------------------------------- -------- --------- ------------------ ----------- ----------
1) The Company provided Mr. Fleming with a car allowance as provided above.
2) Ms. Irwin left the Company on September 14, 2000.
</TABLE>
30
<PAGE>
(c) OPTIONS/SAR GRANTS:
--------------------
During the fiscal year ended December 31, 1999, no executive officer of the
Company received any options.
(d) AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE:
------------------------------------------------------------------------
During the fiscal year ended December 31, 1999, 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, 1999, 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.
(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.
----------------------------------------
31
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1999, 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 COMMON SERIES A SERIES E SERIES F
BENEFICIAL OWNER STOCK(2) PREFERRED PREFERRED(3) PREFERRED(4)
------------------------------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Officers and Directors:
------------------------------ ---------- --------- ------------ ------------
Thomas T. Fleming(5) 1,673,470 3,000 1,270.6
(10.5%)
------------------------------ ---------- --------- ------------ ------------
Rose S. DiOttavio(6) 1,687,500 3,000 350
(10.6%)
------------------------------ ---------- --------- ------------ ------------
Thomas X. Flaherty(7) 405,000
(*)
------------------------------ ---------- --------- ------------ ------------
Mark Novitsky (9) 50,000
(*)
------------------------------ ---------- --------- ------------ ------------
Fred Bauer (11) 53,500
(*)
------------------------------ ---------- --------- ------------ ------------
Total Officers and Directors: 3,869,470 6,000 1,620.6
(21.8%)
------------------------------ ---------- --------- ------------ ------------
(b) Other Beneficial Owners:
------------------------------ ---------- --------- ------------ ------------
Phila. Ventures, 11, L.P.(14) 1,327,956
Phila. Ventures-Japan 1, L.P. (8.3%)
Phila. Ventures-Japan, 11-L.P.
200 S. Broad Street 8th Floor
Philadelphia, Pa. 19102
------------------------------ ---------- --------- ------------ ------------
Total Other Beneficial Owner 1,327,956
(8.3%)
=================================================================================
(*) 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.
32
<PAGE>
(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 shares 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. 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. 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.
(9) Includes a grant of 50,000 shares of Common Stock to Dr. Novitsky when he
joined the Company.
(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.
(12) Includes a grant of 50,000 shares of Common Stock to Dr. Bauer.
(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.
33
<PAGE>
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.
Thomas T. Fleming
Thomas T. Fleming, Chairman of the Board of Directors and Chief Executive
Officer of the Company, has advanced funds to the Company in the form of either
direct advances or payments to vendors on behalf of the Company. A substantial
portion of these advances consisted of borrowings from various financial
institutions for the sole benefit of the Company. These amounts were advanced
to the Company under the same terms obtained by Mr. Fleming from the financial
institutions. During the years ended December 31, 1999 and 1998, Mr. Fleming
advanced $51,004 and $447,624, respectively. Additionally, repayments to Mr.
Fleming or to financial institutions for his benefit where funds had been
borrowed for the Company was $55,000 and $612,180 during those same years.
In March 1999, the Company assumed financial responsibility for one of these
loans in the amount of approximately $731,000. This loan continues to be secured
by the personal assets of Mr. Fleming and selected assets of Ms. DiOttavio.
Mr. Fleming is the guarantor of various financial obligations of the Company,
including the amount assumed by the Company noted above. Additionally, he has
advanced funds under certificates of deposit for the benefit of the Company in
order to comply with state regulations for one of its subsidiaries.
Phyllys B. Fleming
Phyllys B. Fleming, wife of the Chairman of the Board of Directors, has
guaranteed certain obligations of the Company with various financial
institutions by either granting a security in personal assets controlled by the
Fleming Family Trust or by pledging letters of credit for the benefit of certain
creditors. She has also funded interest payments on certain obligations for the
benefit of the Company.
34
<PAGE>
Rose S. DiOttavio
Rose S. DiOttavio, President and Chief Operating Officer, has loaned funds to
the Company in a fashion similar to Mr. Fleming noted above. During the years
ended December 31, 1999 and 1998, Ms. DiOttavio advanced $5,767 and $148,000,
respectively. Additionally, repayments of $10,000 and $-0- were made during
those same years.
Ms. DiOttavio is also a guarantor of various financial obligations of the
Company. Additionally, she has advanced funds under certificates of deposit for
the benefit of the Company in order to comply with state regulations for one of
its subsidiaries.
Federal Development Company, LLC
In October 1996, the Company entered into a Development Management Agreement
with Federal Development Company, LLC ("Federal"). Mr. Christopher Fleming, the
son of Thomas T. Fleming, the Chairman of the Board of Directors, is a senior
officer of Federal. Federal was retained by the Company to provide management
services of the real estate owned by the Company, principally the Kirkbride
Center. For the years ended December 31, 1999 and 1998, the Company has paid
Federal in cash and stock $-0- and $62,500, respectively.
The Company and Federal entered into an amended development management agreement
in August of 1999. This agreement provided for the settlement of all past due
fees and grants Federal the rights to act as agent for the sale of certain real
estate assets of the Company.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of financial statements filed as part of this report is set forth on
page 36 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
35
<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 November 28, 2000.
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 November 28, 2000.
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
36
<PAGE>
CORECARE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONTENTS
================================================================================
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3-4
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet 5-6
Statements of operations 7-8
Statements of changes in stockholders' (deficiency) 9-10
Statements of cash flows 11-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13-60
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
CoreCare Systems, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of CoreCare Systems,
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, changes in stockholders' (deficiency) and cash flows
for the year then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CoreCare Systems,
Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is not in compliance with
certain loan covenants with certain lenders and has sustained losses of
$7,251,311 and $10,187,993 for the years ended December 31, 1999 and 1998,
respectively. Additionally, the Company has stockholders' and working capital
deficiencies of $19,556,078 and $30,903,475, respectively at December 31, 1999.
The aforementioned items raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
BDO Seidman, LLP
Philadelphia, Pennsylvania
June 27, 2000, except for Note 20,
which is as of August 24, 2000 and Note 17
which is as of October 18, 2000
3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
CoreCare Systems, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated statement of operations, changes
in stockholders' (deficiency) and cash flows for the year ended December 31,
1998 of CoreCare Systems, Inc. and subsidiaries. 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
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 results of operations and cash flows for the year
ended December 31, 1998 of CoreCare Systems, Inc. and subsidiaries in conformity
with generally accepted accounting principles.
In addition, we have audited the consolidated balance sheet of CoreCare Systems,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' (deficiency) and
cash flows for the year ended December 31, 1997. The balance sheet and statement
of operations as of and for the year ended December 31, 1997 are contained in
Note 22.
As discussed in Note 22 to the financial statements, the Company discovered that
the financial statements for the years ended December 31, 1998 and 1997 had not
accounted for and reflected certain transactions and events in accordance with
generally accepted accounting principles during the audit of the December 31,
1999 financial statements. These financial statements have been restated to
reflect the financial impact of these transactions.
Schiffman Hughes Brown
Blue Bell, Pennsylvania
March 9, 1999, except for Note 22, as to which the date is June 27, 2000
4
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
December 31, 1999
--------------------------------------------------------------------- -----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 826,853
Accounts receivable, net (Note 3) 4,445,643
Prepaid and other current assets 210,166
--------------------------------------------------------------------- -----------
TOTAL CURRENT ASSETS 5,482,662
--------------------------------------------------------------------- -----------
REAL ESTATE HELD FOR SALE (Note 6) 798,396
--------------------------------------------------------------------- -----------
CONTRACT RIGHTS, net of accumulated amortization of $121,955 (Note 5) 24,391
--------------------------------------------------------------------- -----------
PROPERTY, PLANT AND EQUIPMENT, net (Note 4) 11,894,555
--------------------------------------------------------------------- -----------
OTHER ASSETS
Goodwill, net of accumulated amortization of $172,336 (Note 5) 1,482,088
Restricted cash (Note 7) 237,688
Other 330,000
--------------------------------------------------------------------- -----------
TOTAL OTHER ASSETS 2,049,776
--------------------------------------------------------------------- -----------
TOTAL ASSETS $20,249,780
===================================================================== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
December 31, 1999
------------------------------------------------------------------- -------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES
Lines of credit (Note 8) $ 3,643,648
Current maturities of
Long-term debt (Note 9) 19,957,067
Obligations under capital lease (Note 9) 229,850
Accounts payable 3,906,728
Advances, officers/stockholders (Note 10) 700,410
Accrued expenses 3,657,021
Payroll and payroll taxes payable (Note 11) 3,518,547
Current maturities of amounts due to Medicare (Note 12) 772,866
------------------------------------------------------------------- -------------
TOTAL CURRENT LIABILITIES 36,386,137
LONG-TERM AMOUNTS DUE TO MEDICARE (Note 12) 2,063,703
OBLIGATIONS UNDER CAPITAL LEASE, net of current maturities (Note 9) 599,424
LONG-TERM DEBT, net of current maturities (Note 9) 756,594
------------------------------------------------------------------- -------------
TOTAL LIABILITIES 39,805,858
------------------------------------------------------------------- -------------
COMMITMENTS (Note 17)
STOCKHOLDERS' (DEFICIENCY) (Notes 14 and 19)
Preferred stock 17
Common stock, $.001 par value
Authorized 50,000,000 shares
Issued and outstanding 18,084,643 shares at December 31, 1999 18,085
Additional paid-in capital 17,692,143
Accumulated deficit (37,266,323)
------------------------------------------------------------------- -------------
TOTAL STOCKHOLDERS' (DEFICIENCY) (19,556,078)
------------------------------------------------------------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) $ 20,249,780
=================================================================== =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
Year ended December 31, 1999 1998
-------------------------------------- ----------- -------------
(As Restated)
<S> <C> <C>
NET REVENUE
Patient services, net (Note 18) $23,469,373 $ 16,935,837
Management services 855,805 1,962,803
Health and fitness center 344,705 450,625
Rental income 1,129,848 1,055,788
-------------------------------------- ----------- -------------
TOTAL NET REVENUE 25,799,731 20,405,053
-------------------------------------- ----------- -------------
DIRECT COSTS
Patient services 10,355,043 8,884,360
Management services 707,332 842,438
Health and fitness center 281,647 274,201
-------------------------------------- ----------- -------------
TOTAL DIRECT COSTS 11,344,022 10,000,999
-------------------------------------- ----------- -------------
GROSS MARGIN 14,455,709 10,404,054
-------------------------------------- ----------- -------------
OPERATING EXPENSES
Salaries and employee benefits 3,061,190 3,712,425
Selling and administrative 9,474,394 7,933,072
Amortization 760,715 2,200,610
Depreciation 776,620 580,066
Bad debt expense 3,547,355 2,147,140
Impaired asset write-down (Note 2) 930,333 1,121,859
Gain on sale of assets (312,956) -
-------------------------------------- ----------- -------------
TOTAL OPERATING EXPENSES 18,237,651 17,695,172
-------------------------------------- ----------- -------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
Year ended December 31, 1999 1998
------------------------------------------------------- ------------ -------------
(As Restated)
<S> <C> <C>
(LOSS) FROM OPERATIONS $(3,781,942) $ (7,291,118)
INTEREST EXPENSE 3,469,369 2,896,875
------------------------------------------------------- ------------ -------------
NET LOSS $(7,251,311) $(10,187,993)
======================================================= ============ =============
(LOSS) PER SHARE OF COMMON STOCK (BASIC
AND DILUTED) $ (.41) $ (.64)
======================================================= ============ =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING USED IN COMPUTING LOSS PER SHARE
(BASIC AND DILUTED) 17,843,399 15,943,179
======================================================= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' (DEFICIENCY)
================================================================================
Year ended December 31, 1999 and 1998
-------------------------------------------
Preferred Stock Common Stock
----------------- ---------------------
Number Number Additional
of of Paid-In Accumulated
Shares Amount Shares Amount Capital (Deficit)
----------------------------------------------------------- -------- ------- ----------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997
(Note 22) 17,017.9 $ 17 13,506,751 $13,507 $14,803,892 $(19,827,019)
Amounts as restated
Net loss for the year ended December 31, 1998
(Note 22) - - - - - (10,187,993)
Shares issued as compensation for services rendered by
nonemployees - - 1,114,916 1,115 634,331 -
Shares issued as employee compensation - - 49,800 50 38,295 -
Shares issued in conjunction with debt forbearance - - 889,218 889 426,376 -
Shares redeemed - - (2,188) (2) (1,814) -
Shares issued to acquire Preferred Medical Service - - 250,000 250 200,750 -
Options issued as compensation for services rendered
by nonemployees - - - - 238,100 -
Options issued in conjunction with debt forbearance - - - - 79,962 -
Warrants issued in conjunction with debt forbearance - - - - 145,921 -
Redemption of warrants - - - - (500,000) -
Conversion of common stock held as collateral - - 200,000 200 149,800 -
Conversion of mandatory Preferred Stock - - 1,192,046 1,192 1,292,088 -
----------------------------------------------------------- -------- ------- ----------- -------- ------------ -------------
BALANCE, December 31, 1998 (as restated) (Note 22) 17,017.9 17 17,200,543 17,201 17,507,701 (30,015,012)
Total
----------------------------------------------------------- -------------
<S> <C>
BALANCE, December 31, 1997
(Note 22) $ (5,009,603)
Amounts as restated
Net loss for the year ended December 31, 1998
(Note 22) (10,187,993)
Shares issued as compensation for services rendered by
nonemployees 635,446
Shares issued as employee compensation 38,345
Shares issued in conjunction with debt forbearance 427,265
Shares redeemed (1,816)
Shares issued to acquire Preferred Medical Service 201,000
Options issued as compensation for services rendered
by nonemployees 238,100
Options issued in conjunction with debt forbearance 79,962
Warrants issued in conjunction with debt forbearance 145,921
Redemption of warrants (500,000)
Conversion of common stock held as collateral 150,000
Conversion of mandatory Preferred Stock 1,293,280
----------------------------------------------------------- -------------
BALANCE, December 31, 1998 (as restated) (Note 22) (12,490,093)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' (DEFICIENCY)
================================================================================
Year ended December 31, 1999 and 1998
-------------------------------------------
Preferred Stock Common Stock
----------------- -------------------
Number Number Additional
of of Paid-In Accumulated
Shares Amount Shares Amount Capital (Deficit)
-------------------------------------------------------- -------- ------- ---------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 (as restated) (Note 22)
(brought forward) 17,017.9 $ 17 17,200,543 $17,201 $17,507,701 $(30,015,012)
Net loss for year ended December 31, 1999 (7,251,311)
Shares issued as compensation for services rendered by
nonemployees - - 30,000 30 10,170 -
Shares issued as employee compensation - - 354,100 354 25,127 -
Shares issued in conjunction with debt - - 150,000 150 18,600 -
Shares issued in conjunction with debt forbearance - - 300,000 300 37,200 -
Shares issued to cancel stock options granted to
nonemployees - - 50,000 50 6,200 -
Options issued as compensation for services rendered by
nonemployees - - - - 3,746 -
Warrants issued for services rendered by nonemployees - - - - 9,085 -
Warrants issued with debt - - - - 42,786 -
Warrants issued in conjunction with debt forbearance - - - - 81,528 -
Redemption of warrants - - - - (50,000) -
-------------------------------------------------------- -------- ------- ---------- ------- ------------ -------------
BALANCE, December 31, 1999 17,017.9 $ 17 18,084,643 $18,085 $17,692,143 $(37,266,323)
======================================================== ======== ======= ========== ======= ============ =============
Total
--------------------------------------------------------- -------------
<S> <C>
BALANCE, December 31, 1998 (as restated) (Note 22)
(brought forward) $(12,490,093)
Net loss for year ended December 31, 1999 (7,251,311)
Shares issued as compensation for services rendered by
nonemployees 10,200
Shares issued as employee compensation 25,481
Shares issued in conjunction with debt 18,750
Shares issued in conjunction with debt forbearance 37,500
Shares issued to cancel stock options granted to
nonemployees 6,250
Options issued as compensation for services rendered by
nonemployees 3,746
Warrants issued for services rendered by nonemployees 9,085
Warrants issued with debt 42,786
Warrants issued in conjunction with debt forbearance 81,528
Redemption of warrants (50,000)
--------------------------------------------------------- -------------
BALANCE, December 31, 1999 $(19,556,078)
========================================================= =============
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
Year ended December 31, 1999 1998
------------------------------------------------------------------ -------------- --------------
(As Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (7,251,311) $ (10,187,993)
Noncash adjustments to reconcile net loss to
net cash (used in) operating activities
Common stock issued for services and interest expense 98,181 842,644
Options and warrants issued for services rendered and
financing costs 137,145 463,983
Depreciation 776,620 580,066
Amortization 760,715 2,200,610
Impaired asset write-down 930,333 1,121,859
Provision for doubtful accounts 2,725,846 (224,069)
Gain on sale of assets (312,956) -
Changes in assets and liabilities
(Increase) decrease in operating assets
Accounts receivable (2,814,554) (1,157,323)
Other current assets (34,507) 36,708
Deposits 10,467 98,001
Other assets 561,403 (179,469)
Increase (decrease) in operating liabilities
Accounts payable 765,513 1,485,848
Accrued expenses 1,318,913 (27,539)
Payroll taxes payable 416,038 1,414,404
Due to Medicare 1,622,566 1,214,003
------------------------------------------------------------------ -------------- --------------
NET CASH (USED IN) OPERATING ACTIVITIES (289,588) (2,318,267)
------------------------------------------------------------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in capitalized financing costs - (1,828,938)
Purchase of property and equipment (81,396) (3,170,802)
Proceeds from sale of equipment and land 507,066 -
------------------------------------------------------------------ -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 425,670 (4,999,740)
------------------------------------------------------------------ -------------- --------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
Year ended December 31, 1999 1998
------------------------------------------------------------------ -------------- --------------
(As Restated)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock $ - $ 256,597
Advances from officers/stockholders advances 56,771 595,624
Repayment of officers/stockholders (65,000) (612,180)
Repayment of notes (530,850) (11,298,070)
Repayment of lease obligations (129,429) (56,337)
Proceeds from notes 1,959,093 1,372,503
Proceeds from short and long-term debt - 13,151,789
Increase in debt due to accrued interest - 992,592
Proceeds from (repayment of ) line of credit (665,056) 2,726,463
Redemption of warrants (50,000) -
------------------------------------------------------------------ -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 575,529 7,128,981
------------------------------------------------------------------ -------------- --------------
NET INCREASE (DECREASE) IN CASH 711,611 (189,026)
CASH AT BEGINNING OF YEAR 115,242 304,268
------------------------------------------------------------------ -------------- --------------
CASH AT END OF YEAR $ 826,853 $ 115,242
================================================================== ============== ==============
Cash paid during the year for
Interest $ 2,465,950 $ 815,705
================================================================== ============== ==============
Taxes $ - $ -
================================================================== ============== ==============
Redemption of warrants for debt $ - $ 500,000
Common stock issued in connection with
acquisition of businesses $ - $ 201,000
Common stock issued as compensation for
services provided and interest expense $ 98,181 $ 842,644
Stock options and warrants issued for services
provided and financing costs $ 137,145 $ 463,983
Property and equipment acquired under
capital leases $ 571,583 $ 402,138
================================================================== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BASIS OF PRESENTATION AND BUSINESS DESCRIPTION
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared assuming CoreCare Systems, Inc. and subsidiaries
(collectively the "Company") will continue as a going concern,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has
incurred losses of $7,251,311 and $10,187,993 for the years ended
December 31, 1999 and 1998, respectively. Additionally, the
Company has stockholders' and working capital deficiencies of
$19,556,078 and $30,903,475, respectively, at December 31, 1999.
Additionally, the Company is not in compliance with certain loan
covenants with certain lenders, therefore, payments could be
demanded immediately. The Company is continuing discussions with
these lenders as to the granting of waivers or other remedies
that could be reached in connection with its debt obligations.
The Company is continuing to monitor and reduce its operating
expenses, including payroll, and is also considering the sale of
certain assets as well as exploring other alternatives,
including, but not limited to, refinancing opportunities.
The Company has restructured its business operations to focus on
and expand those service programs which are profitable such as
its rehabilitation programs, rental income, and clinical drug
trial services. During 1999 and early 2000, the Company closed,
sold, and sharply contracted its nonprofitable activities which
should reduce future operating losses. The Company has
substantially reduced its overhead costs over the 12-month period
ending June 2000 and will continue to do so in the future. The
remaining operations of the Company have demonstrated improved
performance as a result of closing facilities and eliminating
their related expenditures. As a result of management's efforts
to eliminate and reduce unnecessary expenditures, the Company has
improved its operating results.
The Company believes it has the resources and ability to resolve
its liquidity problems. The Company is in negotiation with its
largest payor to resolve claims for services provided over the
past two years. Upon the successful conclusion of the
negotiation, the Company expects the payor to release funds which
the Company will apply to reducing current liabilities.
Additionally, the Company has entered into agreements for the
sale of certain nonoperating surplus real estate, which will
provide liquidity. Finally, the Company is in the process of
obtaining alternate sources of financing and believes it will be
able to refinance short-term liabilities on a long-term basis and
generate additional liquidity. However, there can be no
assurances that the Company will be successful in these areas.
13
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Although management believes the Company will continue to operate
due to the restructuring, the resources and opportunities
described above and the financial condition of the Company at
December 31, 1999 raises a substantial doubt about the Company's
ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern.
BUSINESS DESCRIPTION
CoreCare Systems, Inc., through its six operating subsidiaries,
owns and operates a comprehensive array of behavioral health
service programs, including acute inpatient psychiatric and drug
and alcohol rehabilitation services; conducts clinical drug
trials for the pharmaceutical industry; operated a health and
fitness center; provided practice management and billing services
to nonrelated physician clients and leases space at its Kirkbride
facility to third parties. (see Notes 3 and 18)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of CoreCare Systems, Inc. and its wholly owned
subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
14
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The Company reviews all significant estimates affecting
the financial statements on a recurring basis and records the
effect of any adjustments when necessary.
CONCENTRATION OF CREDIT RISK
Financial instruments, which subject the Company to concentration
of credit risk, consist principally of trade receivables from
government health care systems, such as Medicare, Medicaid and
Community Behavioral Health. The Company establishes a provision
for doubtful accounts based upon factors surrounding the credit
risk of specific payors, historical trends and other information.
(see Notes 3 and 18)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. 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 and
amortization are provided using the straight-line method over the
estimated useful life of the respective assets.
15
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
DEFERRED FINANCE COSTS
Deferred finance costs arising from the incurrence of long-term
debt is being amortized using the straight-line method over the
terms of the related debt.
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.
Contract rights were amortized on a straight-line basis over a
three to five-year period.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable based on undiscounted
estimated future operating cash flows. For the years ended
December 31, 1999 and 1998, the Company has recorded asset
impairment write downs of $930,333 and $1,121,859, respectively,
related to terminated operations. (see Note 5)
Asset impairment by class for the years ended December 31, 1999
and 1998 is summarized as follows:
Year ended December 31, 1999 1998
---------------------------------------------------------
Contract rights $ 244,035 $ -
Goodwill 186,298 752,479
Assets held for sale (a) 500,000 369,380
---------------------------------------------------------
$ 930,333 $ 1,121,859
=========================================================
(a) See Note 20 for sale of related property.
16
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NET PATIENT SERVICE REVENUE
Patient service revenue is recorded net of contractual allowances
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.
INCOME TAXES
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). SFAS No. 109 requires a company to recognize
deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in its financial
statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between
the financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which has recognition provisions that establish
fair value as the measurement basis for transactions in which an
entity acquires goods or services from nonemployees in exchange
for equity instruments. SFAS No. 123 also has certain disclosure
provisions. Adoption of the recognition provisions of SFAS No.
123 with regard to these transactions with nonemployees was
required for all such transactions entered into after December
15, 1995. The recognition provision with regard to the fair value
based method of accounting for stock-based employee compensation
plans is optional. Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" uses what is
referred to as an intrinsic value based method of accounting. The
Company has decided to apply APB No. 25 for its stock-based
employee compensation arrangements.
17
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". Basic earnings
per share includes no dilution and is computed by dividing net
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity and is computed by
dividing the net income available to common stockholders by the
weighted average number of common and common equivalent shares
outstanding during the period. Equivalents, including warrants,
stock options and preferred stock, were not included in diluted
net loss per share as their effect would be antidilutive for all
periods presented.
COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components
in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from
nonowner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive
income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1999, in assessing the fair value of financial
instruments, the Company has used a variety of methods and
assumptions, which were based on estimates of market conditions
and loan risks existing at that time. For certain instruments,
including accounts receivable, accounts payable and short-term
debt, it was estimated that the carrying amount approximated fair
value for these instruments because of their short-term maturity.
The carrying amounts of long-term debt approximate fair value
since the Company's interest rates approximate current interest
rates.
18
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
RECLASSIFICATION
Certain amounts in the 1998 financial statements have been
reclassified to conform with the 1999 presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee
("ACSEC") issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5), which requires the
costs of start-up activities to be expensed as incurred. SOP 98-5
is required to be adopted for years beginning after December 15,
1998. This statement did not materially effect the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 was
amended in June 1999, with the issuance of SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". SFAS
No. 137 makes SFAS No. 133 effective for all fiscal quarters of
the fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities and
measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income
and subsequently reclassified into income when the transaction
affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the
period of change. Presently, the Company does not use derivative
instruments either in hedging activities or as investments.
Accordingly, the Company believes that the adoption of SFAS No.
133 will have no impact on its financial position or results of
operations.
19
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". This pronouncement provides
guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company believes that the
adoption of SAB No. 101 in the fourth quarter of 2000 will have
no impact on its financial position or results of operations.
RESTATEMENT
Certain items in the 1998 and 1997 financial statements have been
revised as a result of the audit of the financial statements as
of and for the year ended December 31, 1999. (see Note 22 for
additional information)
3. ACCOUNTS RECEIVABLE
As of December 31, 1999, accounts receivable and allowance for
doubtful accounts are as set forth below:
December 31, 1999
--------------------------------------------------
Total accounts receivable $ 8,101,489
Provision for doubtful accounts 3,655,846
--------------------------------------------------
Accounts receivable, net $ 4,445,643
==================================================
At December 31, 1999, the Company's three largest payors
represented 51% of the total receivable outstanding. (see Note
8(c))
20
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1999, property, plant and equipment consisted
of the following:
December 31, 1999
----------------------------------------------------------------
Estimated
Useful
Life in
Years
----------------------------------------------------------------
Land -- $ 1,875,546
Buildings 31.5 to 40.0 7,442,123
Building improvements 31.5 to 40.0 2,111,514
Furniture and equipment 5.0 to 7.0 924,923
Automobiles 3.0 to 5.0 55,820
Furniture and equipment under
capital lease 3.0 to 5.0 1,030,746
----------------------------------------------------------------
13,440,672
Less accumulated depreciation 1,546,117
----------------------------------------------------------------
$ 11,894,555
================================================================
Depreciation expense for the years ended December 31, 1999 and
1998 was $776,620 and $580,066, respectively.
5. INTANGIBLE ASSETS
GOODWILL
Goodwill resulting from acquisitions accounted for using the
purchase method is amortized on a straight-line basis over a
40-year period. Amortization expense for the years ended December
31, 1999 and 1998 was $111,975 and $131,519, respectively. (see
Note 2)
21
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONTRACT RIGHTS
Contract rights resulting from acquisitions were amortized on a
straight-line basis over periods ranging from 3 to 5 years.
Amortization expense for the years ended December 31, 1999 and
1998 was $249,467 and $237,536, respectively. (see Note 2)
6. REAL ESTATE HELD FOR SALE
On July 22, 1992, in connection with the acquisition of Lakewood
Retreat, Inc., the Company purchased real estate which included
approximately 61 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.
During 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, 1997, the asset was recorded at
the lower of cost or the appraised value.
At December 31, 1999 and 1998, the Company recorded a reserve
against the asset totaling $913,723 and $413,723, respectively.
(see Note 20)
During 1999, the Company subdivided a five-acre parcel of land
contiguous to the Kirkbride Center. A one-acre parcel was sold
during the year resulting in a gain of approximately $350,000.
The cost of the remaining four-acre parcel of $250,010 has been
classified as real estate held for sale as of December 31, 1999.
On February 29, 2000, the Company, Franklin Development Company,
LLC (a related party, see Note 16) and J&K Development, LLC
entered into an agreement of sale for the four acre parcel of
land. (see Note 20)
22
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. RESTRICTED CASH
Restricted cash consists of various certificates of deposit in
accordance with the terms of certain mortgage agreements and
state regulations in connection with the operating activities of
one of the Company's wholly owned subsidiaries.
Restricted cash consists of certificates of deposit with interest
rates ranging from 4.25% to 5.0%. These investments are held in
the Company's name and are deposited with a major financial
institution.
8. LINES OF CREDIT
Outstanding balances under various facilities are as follows:
LINES OF CREDIT
December 31, 1999
-----------------------------------------------------------------
Interest %
Per Annum Balance
-----------------------------------------------------------------
United States Trust
Company of New York (A) Bank's prime rate $ 1,100,000
Madison Bank (B) Prime rate plus 1.5% 468,500
Heller Financial, Inc. (C) Prime rate plus 1.75% 2,075,148
-----------------------------------------------------------------
$ 3,643,648
=================================================================
(A) 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 (8.5% as of December
31, 1999) and is collateralized by certain marketable
securities pledged by the chairman's spouse. The line of
credit expired in May 2000. The financing company has
extended this facility until January 2001.
(B) The Company has also borrowed $468,500 under its May 1998
line of credit facility agreements with another bank which
is collateralized by an irrevocable letter of credit in the
amount of $475,000. Interest on outstanding balances accrues
at the rate of prime plus 1.5% (10% as of December 31,
1999). The facility matured in January 2000 and the Company
is currently negotiating a line of credit agreement.
23
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(C) In May 1998, the Company entered into a line of credit
agreement with a financial institution in the amount of
$5,000,000. The credit line bears interest at the bank's
prime rate (10.25% as of December 31, 1999). In 1999, the
Company entered into a forbearance agreement regarding
noncompliance with certain loan covenants. The Company
granted a $2,000,000 lien against the Kirkbride facility
which would be subordinated to the mortgage with WRH
Mortgage as additional security for the line of credit. The
line of credit is collateralized by certain accounts
receivable. This line of credit matured in May 2000. The
financing company has extended this facility until January
2001. (see Note 3)
<TABLE>
<CAPTION>
9. DEBT
NOTES AND MORTGAGES PAYABLE:
December 31, 1999
--------------------------------------------------------------------------------------------------
Interest %
Per Annum Current Long-Term
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORECARE BEHAVIORAL HEALTH MANAGEMENT (CBHM)
WRH Mortgage, Inc. (A) LIBOR rate plus 6.5% $12,900,247 $ -
(12.92% at 12/31/99)
Community Behavioral Health (B) N/A 1,211,979 -
The Pennsylvania Hospital of the (C) Prime plus 1% (9.5% at 358,166 -
University of the Pennsylvania Health 12/31/99)
Domas, Inc. (D) 8.50% 247,634 -
Service Master Diversified Health (E) Prime plus 1% (9.5% at 181,914 29,175
Management, Inc. 12/31/99)
Ford Motor Credit (F) 11.00% 4,733 9,249
Laboratory Corporation of America (G) 12% 1,653 -
24
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
December 31, 1999
----------------------------------------------------------------------------------------------------
Interest %
Per Annum Current Long-Term
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WESTMEADE HEALTHCARE, INC.
Finova Capital Corporation (Finova) (H) Treasury rate plus 4.5% $ 1,677,437 $ -
(Senior Mortgage) (10.94% at 12/31/99)
Finova Capital Corporation (Finova) (I) Treasury rate plus 4.5% 478,062 -
(Junior Mortgage) (10.94% at 12/31/99)
MANAGED CAREWARE, INC.
Preferred Medical (J) 5.54% 61,092 -
CORECARE SYSTEMS, INC.
Merrill Lynch (K) Various 749,539 -
Mentor Capital Partners, Ltd. (Mentor) (L) 12% 499,667 -
Steve Guarino (M) 20% 263,238 -
Don Won Kang (N) 20% - 250,000
Tak Soon Yun (O) 20% - 235,000
Jung & Eun Lee (P) 20% - 215,000
GMAC (Q) 2.9% 8,856 18,170
Mark Wachs (R) 10% 20,000 -
Senior Lifestyles, Inc. (S) - 10,000 -
Blue Bell Capital (T) 11% - -
LAKEWOOD RETREAT, INC.
Unicorn Financiera Company Limited (U) 11% 884,000 -
Donald Camplese (V) $ 82 per day 249,640 -
WESTMEADE CENTER AT WYNDMOOR, INC.
Elliott Kremms (W) N/A 149,210 -
----------------------------------------------------------------------------------------------------
$19,957,067 $ 756,594
====================================================================================================
</TABLE>
25
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(A) Original loan dated February 24, 1998, interest is payable
monthly at LIBOR plus 6.5% per annum, collateralized by
assets of CoreCare Behavioral Health Management, Inc. and
matured on February 26, 1999. On February 5, 1999, the
mortgage note was extended to June 30, 1999. Additional
collateral was assumed in April 1998 to expand the original
mortgage to repay other short-term loans. The collateral was
a second mortgage assignment on the Lakewood Retreat
Property, assignment of rents and leases at the Kirkbride
facility, security agreement, and a fixture filing executed
by Lakewood Retreat, Inc. The mortgage holder has 600,000
shares of CoreCare Systems and 100 shares of Managed
Careware, Inc.'s common stock as additional collateral. The
Company was not compliant with various loan covenants as of
December 31, 1999. During June 2000, the Company obtained
forbearance under the terms of the original loan agreements
for certain defaults until December 31, 2000. The
forbearance also provides for a further extension until May
31, 2001 if certain requirements are met. The Company paid a
1% fee on the outstanding balance in consideration for this
forbearance.
(B) Amount represents a noninterest-bearing advance from
Community Behavioral Health Corporation based on certain
accounts receivable due from this company. The amount is
payable beginning March 2000 through December 2000 in
monthly installments ranging from $50,000 to $125,000, with
a balloon payment totaling $326,530 on December 31, 2000.
(C) Payable in weekly installments of $2,500 plus interest at
the rate of prime plus 1% per annum. The note holder
possesses the right to setoff up to $273,000 against certain
leases with the Company under the terms of a forbearance
agreement.
(D) Payable in weekly installments of $7,500, including
principal and interest at 8.5% per annum. The entire
principal and any unpaid interest was due and payable in
full on February 28, 2000. However, the obligation has not
been satisfied in accordance with the terms of the
agreement. To date, the lender has not exercised its rights
under this debt agreement.
26
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(E) Payable in bi-weekly installments of $6,000, including
principal and interest at prime plus 1% per annum. This
amount was paid in full in March 2000.
(F) Payable in monthly installments of $417, including principal
and interest at 11% per annum maturing January 2003. The
note is collateralized by the vehicle.
(G) Payable in monthly installments of $12,000, including
principal and interest at 12% per annum.
(H) In June 1996, through a refinancing of the then existing
debt, the Company obtained financing pursuant to a mortgage
note payable to a finance company. The mortgage note which
bears interest at the average rate of 10.94% 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, partially guaranteed by two
officers and stockholders of the Company and a letter of
credit for $175,000.
The Company is in default of this senior mortgage as of
October 27, 1999. As a consequence of the events of default
on October 27, 1999, Finova effected a partial draw down of
the letter of credit in the amount of $25,813. The Company
obtained a forbearance agreement on November 5, 1999, under
which Finova agrees to forbear until February 3, 2000. The
forbearance agreement states that the Company comply with
certain conditions on or before February 3, 2000. In order
to execute this agreement, the Company paid a forbearance
fee of $6,453 plus all fees, costs and expenses incurred by
Finova in connection with this agreement. To date, the
lender has not exercised its rights under this agreement.
27
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(I) In February 1997, the Company obtained financing pursuant to
a mortgage note payable to an independent finance company.
The mortgage is being amortized over 20 years with monthly
payments of $5,140 and a final payment of any unpaid
principal and interest due on June 27, 2001. 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 stockholders of the Company.
The Company was in default of this junior mortgage as of
October 27, 1999. As a consequence of the events of default
on October 27, 1999, the Company obtained a forbearance
agreement on November 5, 1999, which agrees to forbear until
February 3, 2000. The forbearance agreement states that the
Company comply with certain conditions on or before February
3, 2000. To date, the lender has not exercised its rights
under this agreement.
(J) Demand note payable for the acquisition of Preferred Medical
Services, Inc. bearing interest of 5.54%. Interest on the
outstanding principal amount shall be due when the principal
amount is paid. Upon an event of default, interest shall
accrue at a rate of 12% per annum from the date of the
default until complete satisfaction of the obligation
occurs. (see Note 16)
(K) Note payable in monthly installments of $10,000 per month
until December 31, 1999, at which time the balance and all
accrued interest is payable on demand. The rate of interest
charged monthly on the balance will be the "Base Lending
Rate" (7.875% at December 31, 1999), plus .625% through
2.625% based on the outstanding loan balance (combined 8.5%
at December 31, 1999). This note is guaranteed by a
corporate officer and the pledge of certain personal assets.
(L) Subordinated note bearing 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 an exercise price of $1.50
per share expiring August 2001. As principal and some
interest payments were not paid when due in 1999 and 1998,
Mentor has been issued additional warrants to purchase
512,876 shares of common stock at an exercise price of $1
per share expiring in August 2006.
28
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(M) Investor notes payable bearing interest at rates ranging
from 11% to 20% during the three-year period ending December
31, 1999. These notes matured during 1997 and the Company is
currently negotiating repayment provisions. The Company has
issued 300,000 shares of common stock and warrants to
purchase 211,400 shares of common stock at exercise prices
ranging from $1.50 to $3.00 per share in lieu of past due
interest and missed principal payments on the outstanding
debt.
(N) Investor note bearing interest of 20% per annum, payable
monthly, maturing in October 2001. The entire principal and
any unpaid interest matures in December 2001. The investor
also received 30,000 shares of restricted common stock upon
execution of the note.
(O) Investor notes, interest payable monthly at the rate of 20%
per annum. The entire principal and any unpaid interest
matures in December 2001. The investor also received 90,000
shares of restricted common stock upon execution of the
notes.
(P) Investor note, interest payable monthly at the rate of 20%
per annum. The entire principal and any unpaid interest
matures in October 2001. The investor also received 30,000
shares of restricted common stock upon execution of the
note.
29
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(Q) Auto note payable in monthly installments of $575, including
principal and interest at 2.9% per annum maturing September
2003. The note is collateralized by the vehicle.
(R) Convertible promissory note bearing interest at the rate of
10% per annum. The note is convertible into common stock of
the Company at the rate of one share of common stock for
each $1.50 of debt converted. The note also carries a
warrant to purchase 400 shares of common stock at an
exercise price of $3.00 per share for each $1,000 of debt
converted.
(S) Noninterest-bearing demand note payable to a related party.
(T) Promissory note, interest payable monthly at the rate of 11%
per annum.
The Company issued a warrant, which contained a put feature,
to purchase 200,000 shares of common stock at an exercise
price of $1.00 per share, expiring June 30, 2002. The lender
has "put" the warrant to the Company at $1.50 per share in
accordance with the agreement. The Company recorded a charge
of $200,000 in 1999 related to the put feature of the
warrant.
On October 31, 1999, the above note was purchased by Jung
and Eun Lee. (see Note P above)
(U) Mortgage note 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 $548,386. The mortgage
note payable matured in 1996, including various extensions.
The terms of these extensions required the Company to make
principal payments of $50,000 per month and to issue 15,000
shares of its common stock to the mortgagee. No payments
have been made on this obligation since 1996. (see Note 20)
30
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(V) Judgement order in the amount of $314,592, including
interest and fees in the amount of $64,952. Interest is
accruing at the rate of $82 per day since May 1, 1999. (see
Note 20)
(W) Amounts due under a lease separation agreement effective
September 2, 1997 totaling $202,000. The Company is
currently in default of the payment arrangements and is
negotiating new payment terms. (see Note 20)
The amounts of principal repayment are as follows:
Year ending December 31, Amount
----------------------------------------------------
2000 $ 19,957,067
2001 739,772
2002 11,300
2003 5,522
----------------------------------------------------
$ 20,713,661
====================================================
31
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
OBLIGATIONS UNDER CAPITAL LEASES
The future minimum lease payments under capital leases as of
December 31, 1999 are as follows:
Year ending December 31, Amount
-----------------------------------------------------------------
2000 $ 276,031
2001 240,466
2002 205,677
2003 128,923
2004 73,923
-----------------------------------------------------------------
Total minimum lease payments 925,020
Less amount representing interest (5.2% to 8.5%) 95,746
-----------------------------------------------------------------
Present value of net minimum lease payments 829,274
Less current maturities of capital lease obligations 229,850
-----------------------------------------------------------------
$ 599,424
=================================================================
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 useful lives.
During 1999 and 1998, the Company entered into capital lease
obligations totaling $543,407 and $402,138, respectively, for the
purchase of equipment. Depreciation and amortization on the
equipment acquired under capital leases was $143,289 and $90,766
for 1999 and 1998, respectively. The net book value of equipment
under capital leases at December 31, 1999 and 1998 amounted to
$790,388 and $390,269, respectively.
32
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. ADVANCES, OFFICERS/ STOCKHOLDERS
Amounts are payable to two officers/stockholders totaling
$700,410 as of December 31, 1999. These amounts reflect both
direct advances to the Company as well as monies advanced to
cover expenses paid on behalf of the Company.
Certain of these amounts bear a market rate of interest as these
amounts resulted from the officers borrowing funds from financial
institutions for the benefit of the Company. During 1999, the
Company assumed financial responsibility for one of these loans
in the amount of $731,239; however, personal guarantees and
personal assets of corporate officers continue to secure these
loans. The Company also repaid $225,000 to these
officers/shareholders, or to financial institutions for loans
that benefited the Company, during 1999.
11. PAYROLL AND PAYROLL TAXES PAYABLE
INTERNAL REVENUE SERVICE
In November 1999, Westmeade Healthcare, Inc. filed installment
agreements to repay past due payroll taxes. The Company agreed to
pay the federal taxes owed plus penalties and interest in monthly
payments of $5,000 due on the 15th of each month, then on July 1,
2000 the amount will increase to $10,000 due on the 15th of each
month until the total liability of approximately $223,700 is paid
in full.
On November 29, 1999, Managed Careware, Inc. filed installment
agreements to repay past due payroll taxes. The Company agreed to
pay the federal taxes owed plus penalties and interest in monthly
payments of $5,000 due on the 15th of each month, then on July 1,
2000 the amount will increase to $10,000 due on the 15th of each
month until the total liability of approximately $211,000 is paid
in full.
33
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On November 29, 1999, CBHM filed installment agreements to repay
past due payroll taxes. The Company agreed to pay the federal
taxes owed plus penalties and interest in monthly payments of
$10,000 due on the 15th of each month, then on July 1, 2000 the
amount will increase to $50,000 due on the 15th of each month
until the total liability of approximately $1,331,900 is paid in
full.
On November 29, 1999, Chestnut Hill Fitness Club, Inc. filed an
installment agreement to repay past due payroll taxes. The
Company agreed to pay the federal taxes owed plus penalties and
interest in monthly payments of $5,000 due on the 15th of each
month until the total liability of approximately $20,000 is paid
in full.
PENNSYLVANIA DEPARTMENT OF REVENUE
The Company owes the Pennsylvania Department of Revenue
approximately $248,145 for current and past due payroll taxes
plus approximately $193,360 in penalties and interest. The
Company has negotiated a payment plan for the outstanding
balance.
CITY OF PHILADELPHIA
The Company owes the City of Philadelphia approximately $981,000
for current and past due payroll taxes plus approximately
$357,532 in penalties and interest. The Company has not
negotiated any payment plan for the outstanding balance. (see
Note 17)
COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF LABOR AND INDUSTRY
As of December 31, 1999, the Company is negotiating to repay the
Pennsylvania unemployment contributions outstanding balance of
approximately $95,800.
34
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. DUE TO MEDICARE
During 1999, the Company negotiated a repayment plan with
Medicare to pay back 1998 over reimbursements received in the
amount of approximately $1,200,000. The repayments are payable in
monthly installments of $47,386, including principal and interest
at 13.375% per annum until July 2001. The balance due on the 1998
over reimbursements as of December 31, 1999 is $807,314.
The Company is required to file a "Hospital and Hospital Health
Care Complex Cost Report Certification and Settlement Summary"
(cost report) with Medicare annually. The cost report reconciles
allowable reimbursable expenditures to actual reimbursements from
Medicare. If the Company was under reimbursed during the period,
additional reimbursements would be made by Medicare. Conversely,
if the Company had been over reimbursed, during the period, the
over reimbursement would be required to be repaid with the annual
filing of the cost report.
The Cost Report filed by the Company for the December 31, 1999
year end shows that the Company has been over reimbursed by
approximately $2,030,000 for that fiscal year. The Company has a
monthly repayment plan requiring monthly payments of $69,050
including principal and interest at 13.75% through June 2003.
13. INCOME TAXES
The Company has net operating loss carryforwards aggregating
approximately $31,100,000 at December 31, 1999 expiring through
2012. SFAS No. 109 requires the establishment of a deferred tax
asset for all deductible temporary differences and operating loss
carryforwards. Because of the uncertainty that the Company will
generate income in the future sufficient to fully or partially
utilize these carryforwards, however, the deferred tax asset of
approximately $12,440,000 is offset by a valuation allowance of
the same amount. Accordingly, no deferred tax asset is reflected
in these financial statements.
Certain amounts of the net operating loss carryforwards may be
limited due to possible changes in the Company's stock ownership.
In addition, the sale of Common Stock by the Company to raise
additional operating funds, if necessary, could limit the
utilization of the otherwise available net operating loss
carryforwards. The grant and/or exercise of stock options by
others would also impact the number of shares that could be sold
by the Company or by significant shareholders without affecting
the net operating loss carryfowards.
35
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. STOCKHOLDERS' EQUITY (DEFICIENCY)
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25) and related interpretations in accounting for its
employee stock options. Under APB No. 25, if the exercise price
of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation
expense is recognized. Effects of applying SFAS No. 123 for
providing pro forma disclosures are not likely to be
representative of the effects on reported net income for future
years.
Pro forma information regarding net loss and loss per share is
required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the
fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions:
December 31, 1999 1998
--------------------------------------------
Expected volatility 45.60% 45.80%
Expected dividend yield 0% 0%
Expected life (term) 5 YEARS 5 years
Risk-Free Interest Rate 6.33% 5.48%
============================================
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
36
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
For purposes of pro forma disclosures, the estimated fair value
of the option is expensed when the options are vested. The
Company's pro forma information follows:
Year ended December 31, 1999 1998
--------------------------------------------------------
Pro forma net loss $(7,266,189) $ (10,209,457)
Pro forma loss
per share
Basic and diluted (.41) (.64)
The weighted-average fair value of options granted (at their
grant date) during the years ended December 31, 1999 and 1998 was
$1.00 and $1.05, respectively.
In July 1996, the Company's Board of Directors and Stockholders
approved and adopted the Company's 1996 Stock Plan (the "Plan").
The Plan, as amended in October 1998, provides for the granting
of options to purchase up to 3,000,000 shares of common stock, at
a price per share as shall be determined by the Company's Board
of Directors from time to time. The Plan provides for the
granting of options that do not qualify under Section 422 of the
Code. Therefore, the Company will recognize compensation expense
for all options issued at less than fair market value on the date
of grant equal to the difference between fair market value on the
date of grant less the option exercise price multiplied by the
number of options granted. No option may have a term longer than
five years. Options under the Plan are nontransferable, except in
the event of death and are only exercisable by the holder while
employed by the Company or until such time as determined by the
Board of Directors at its sole discretion. Unless the Plan is
terminated earlier by the Board, the Plan will terminate in July
2001.
37
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The majority of the options issued under the Plan were fully
vested upon grant. Any options that did not vest upon grant
vested within twelve months of grant date.
A summary of the Company's stock option activity, and related
information for the years ended December 31, 1999 and 1998
follows:
Number Weighted-Average
of Shares Exercise Price
-------------------------------------------------------------
Outstanding December 31, 1997 1,269,445 $ .93
Granted 221,660 $ 1.05
Canceled (215,000) $ .43
Exercised - -
-------------------------------------------------------------
Outstanding, December 31, 1998 1,276,105 $ 1.04
Granted 566,667 $ 1.00
Canceled (155,000) $ 1.34
Exercised - -
-------------------------------------------------------------
Outstanding December 31, 1999 1,687,772 $ 1.00
=============================================================
At December 31, 1999 and 1998, exercisable stock options totaled
1,687,772 and 1,276,105 and had weighted-average exercise prices
of $1.00 and $1.04, respectively.
38
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Options outstanding and exercisable at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
------------------------------------------------------------------------------------------
Weighted-
Range of Weighted- Average Exercise
Exercise Prices Number Outstanding Average Remaining Contractual Life Price
<S> <C> <C> <C>
.10 - $.90 876,105 2.86 yrs. $ .89
1.00 - $1.63 811,667 3.26 yrs. $ 1.63
------------------------------------------------------------------------------------------
1,687,772 3.09 yrs. $ 1.00
==========================================================================================
</TABLE>
The following schedule represents warrants outstanding at
December 31, 1999 and 1998:
Warrants
Exercise
Price
Number Range
of Per
Shares Share
-----------------------------------------------------------
Outstanding, December 31, 1997 4,094,070 $ .80-$3.00
Granted 1,211,691 $1.00- $1.125
Canceled or expired (550,000) $ 2.00
-----------------------------------------------------------
Outstanding, December 31, 1998 4,755,761 $ .80-$3.00
Granted 589,695 $ 1.00-$2.00
Canceled / repurchased (1) (1,569,278) $ 3.00
-----------------------------------------------------------
Outstanding, December 31, 1999 3,776,178 $ .80-$3.00
===========================================================
39
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company has historically issued warrants in connection with
the issuance of debt, extension of debt maturity dates, payment
of past due interest or principal on debt and payments to service
providers for services.
(1) The Company repurchased a warrant issued in connection with
the acquisition of the Westmeade facility for $50,000.
15. RELATED PARTY TRANSACTIONS
THOMAS T. FLEMING
Thomas T. Fleming, Chairman of the Board of Directors and Chief
Executive Officer of the Company, has advanced funds to the
Company in the form of either direct advances or payments to
vendors on behalf of the Company. A substantial portion of these
advances consisted of borrowings from various financial
institutions. These amounts were advanced to the Company under
the same terms obtained by Mr. Fleming from the financial
institutions. During the years ended December 31, 1999 and 1998,
Mr. Fleming advanced $51,004 and $447,624, respectively.
Additionally, repayments to Mr. Fleming or to financial
institutions for his benefit for funds previously loaned to the
Company were $55,000 and $612,180 during those same years.
In March 1999, the Company assumed financial responsibility for
one of these loans in the amount of approximately $731,000. This
loan continues to be secured by the personal assets of Mr.
Fleming.
Mr. Fleming is the guarantor of various financial obligations of
the Company, including the amount assumed by the Company noted
above. Additionally, he has advanced funds under certificates of
deposit for the benefit of the Company in order to comply with
state regulations for one of its subsidiaries. (see Note 10)
PHYLLYS B. FLEMING
Phyllys B. Fleming, wife of the Chairman of the Board of
Directors, has guaranteed certain obligations of the Company with
various financial institutions by either granting a security
interest in personal assets controlled by the Fleming Family
Trust or by pledging letters of credit for the benefit of certain
creditors. She has also funded interest payments on certain
obligations for the benefit of the Company.
40
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
ROSE S. DIOTTAVIO
Rose S. DiOttavio, President and Chief Operating Officer, has
loaned funds to the Company in a fashion similar to Mr. Fleming
noted above. During the years ended December 31, 1999 and 1998,
Ms. DiOttavio advanced $5,767 and $148,000, respectively.
Additionally, repayments of $10,000 and $-0- were made during
those same years.
Ms. DiOttavio is also a guarantor of various financial
obligations of the Company. Additionally, she has advanced funds
under certificates of deposit for the benefit of the Company in
order to comply with state regulations for one of its
subsidiaries. (see Note 10)
FEDERAL DEVELOPMENT COMPANY, LLC
In October 1996, the Company entered into a Development
Management Agreement with Federal Development Company, LLC
("Federal"). Mr. Christopher Fleming, the son of Thomas T.
Fleming, the Chairman of the Board of Directors, is a senior
officer of Federal. Federal was retained by the Company to
provide management services for the real estate owned by the
Company, principally the Kirkbride Center. For the years ended
December 31, 1999 and 1998, the Company has paid Federal in cash
and stock $-0- and $62,500, respectively.
The Company and Federal entered into an amended development
management agreement in August of 1999. This agreement provided
for the settlement of all past due fees and grants Federal the
right to act as agent for the sale of certain real estate assets
of the Company.
41
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. 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
renamed it Kirkbride Center ("Kirkbride"). Kirkbride is comprised
of approximately 420,000 square feet of commercial real estate on
27 acres of land in West Philadelphia, Pennsylvania.
Kirkbride Center was licensed for 120 acute inpatient psychiatric
beds until the fourth quarter of 1999 when the number was reduced
to 80 beds; 32 adult partial hospitalization slots; and
outpatient services. Of its 120 beds, 49 beds hold dual licensure
to treat substance abuse disorders. The Company also operates an
80-bed drug and alcohol rehabilitation program at the Kirkbride
Center. In the fourth quarter of 1999, the Company received
preliminary approval to increase the drug and alcohol program by
20 beds for a total of 100 beds. The Center also holds an
inactive provider 50 license for home services.
The Company is utilizing approximately 25% of the facility for a
120-bed inpatient acute psychiatric hospital 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 acquisition costs of the facility in
the amounts of $462,940 and $562,722, respectively. From February
27, 1997, the date of the acquisition, through December 31, 1997,
Kirkbride capitalized approximately $1,700,000 of costs
associated with improving the facility. During 1998, Kirkbride
capitalized approximately $735,000 of costs associated with
improving the facility.
42
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 reorganized as a Preferred Provider Network for
employee assistance programs.
During 1999 and 1998, the Company developed a new service line
providing clinical drug trial testing of central nervous system
drugs for the pharmaceutical industry.
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. Subsequent to the acquisition, several client
contracts were terminated. The Company is seeking an adjustment
to the purchase price due to the nondisclosure of the status of
these contracts at the date of acquisition. (see Note 9 (J))
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment. Commitments
for minimum rentals under noncancelable leases at December 31,
1999 are as follows:
Year ending December 31, Amount
--------------------------------------
2000 $225,774
2001 48,856
2002 29,144
2003 4,797
2004 4,536
--------------------------------------
Total minimum lease payments $313,107
======================================
43
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Rental expense for the years ended December 31, 1999 and 1998
amounted to approximately $410,000 and $428,000, respectively.
The Company is a lessor of office space. Commitments for minimum
rental income under noncancelable leases at December 31, 1999 are
as follows:
Year ending December 31, Amount
---------------------------------------------
2000 $ 922,565
2001 362,150
2002 322,223
2003 335,126
2004 343,424
Thereafter 797,878
---------------------------------------------
Total minimum lease rental income $3,083,366
=============================================
LITIGATION
The Company is subject to claims and lawsuits in the ordinary
course of business, including those arising from care and
treatment afforded at the Company's hospitals and is party to
various other litigation. However, management believes the
ultimate resolution of these pending proceedings will not have a
material adverse effect on the Company.
The Company is subject to numerous lawsuits from creditors for
amounts due for services rendered and products delivered. In most
cases, the Company has accrued the amount of these claims on its
financial statements. The Company is attempting to work out
payment plans with most of these creditors.
On October 18, 2000, the City of Philadelphia sued the Company in
the Court of Common Pleas of Philadelphia County, Pennsylvania
for unpaid wage taxes for the period February 1997 through March
2000. The amount sought by the City is approximately $1.5
million, which includes approximately $600,000 of interest and
penalties. The Company's financial statements include provisions
for this claim in the amount of approximately $1,000,000. The
Company is currently negotiating the abatement of all interest
and penalties.
44
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
18. NET PATIENT REVENUE
Net patient service revenue for the years ended December 31, 1999
and 1998, consists of the following:
Year ended December 31, 1999 1998
-----------------------------------------------------
Patient service revenue $92,872,994 $54,441,933
Contractual adjustments 69,403,621 37,506,096
-----------------------------------------------------
Net patient service revenue $23,469,373 $16,935,837
=====================================================
Concentration of net patient revenue by payor:
----------------------------------------------------
Year ended December 31, 1999 1998
-----------------------------------------------------
Community Behavioral Health $14,110,288 $10,392,848
Medicare 3,998,885 3,571,807
State of Pennsylvania 1,198,998 1,294,580
All others 4,161,202 1,676,602
-----------------------------------------------------
$23,469,373 $16,935,837
=====================================================
19. CAPITAL STRUCTURE
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, privileges, and ratify
powers, if any, and the restrictions and qualifications of the
share of each series as established. Of the 5,000,000 shares of
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, 6,000 shares have been
designated as Series F Convertible Preferred Stock and 1,000,000
shares have been designated as Series G Convertible Preferred
Stock.
45
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common
Stock, $.001 par value per share. As of December 31, 1999 and
1998, 18,084,643 and 17,200,543 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 holders 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.
46
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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. Stockholders owning Series G Preferred are entitled to
2 votes per share.
Through December 31, 1999, the Company had not declared dividends
on any class of preferred stock.
The table below reflects a summary of the authorized, issued and
outstanding shares of preferred stock during the fiscal years
indicated:
Issued and Outstanding
at December 31,
1999 and 1998
--------------------
Series Authorized Shares Par Value
----------------------------------------
A 10,000 6,000 $ 6
B 7,000 - -
C 25,000 8,147.3 8
D 15,000 - -
E 13,250 - -
F 6,000 2,870.6 3
G 1,000,000 - -
----------------------------------------
17,017.9 $ 17
========================================
47
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, 1999 and 1998. 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 its option, 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.
48
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
SERIES B CONVERTIBLE PREFERRED STOCK
The Company has authorized 7,000 shares of Series B Convertible
Preferred Stock, $.001 par value per share. There were no shares
of Series B Preferred outstanding as of December 31, 1999 and
1998.
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 features 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, $.001 par value per share, of which 8,147.3
shares are issued and outstanding as of December 31, 1999 and
1998. 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 features
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 senior in
rank to all other stock of the Company except for Preferred
Series E which shares the same rank, and for Preferred Series G
which is superior in rank.
49
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company has the right to redeem the Series C Shares at
$100.00 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, $.001 par value
per share, of which no shares are issued and outstanding as of
December 31, 1999 and 1998. 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, $.001 par value
per share. 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 is convertible
at the option of its holder into 100 shares of Common Stock.
Conversion features 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 senior
in rank to all stock of the Company except for Series C which
shares the same rank, and for Preferred Series G, which is
superior in rank.
50
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As of December 31, 1997, the Company has reflected 9,934 shares
of Series E Convertible Preferred Stock issued and outstanding as
redeemable preferred stock with a value of $1,293,280 in their
financial statements.
The holders of such preferred stock exercised their conversion
rights during December 1998 by converting these preferred shares
into 1,192,046 shares of 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 Stock, $.001 par
value per share, of which 2,870.6 shares were issued and
outstanding as of December 31, 1999 and 1998. Holders of shares
of Series F Convertible Stock (the "Series F Preferred") are
entitled to annual dividends of $6.00 per share, payable
semi-annually.
Each share of Series F Preferred is convertible at the option of
its holder into 50 shares of Common Stock. Conversion features
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.
SERIES G CONVERTIBLE PREFERRED STOCK
The Company's Board of Directors has designated 1,000,000 shares
of its Preferred Stock as Series G Convertible Preferred Stock,
$.001 par value per share, of which no shares are issued and
outstanding as of December 31, 1999 and 1998. Holders of shares
of Series G Convertible Preferred Stock (the "Series G
Preferred") are entitled to annual dividends of $.18 per share,
payable semi-annually.
51
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Each share of Series G Preferred is convertible at the option of
its holder into 2 shares of common stock. Conversion features
will be adjusted in the event of any stock splits, dividends on
common stock payable in common stock or similar events. Series G
Preferred has a liquidation value of $2.20 per share in
liquidation of the Company and is senior in rank to all other
stock of the Company.
The Company has the right to redeem the Series G shares at $2.20
per share plus accrued dividends upon not less than thirty (30)
days written notice.
20. SUBSEQUENT EVENTS
CHESTNUT HILL FACILITY
On March 30, 2000, Chestnut Hill Health and Fitness Center Inc.
sold its assets with a net book value of approximately $98,000
for $1 and the assumption of liabilities totaling $97,000. The
assets sold consisted of all inventory, contracts, unencumbered
equipment and leased equipment. The liabilities assumed by the
buyer were membership contracts and other liabilities associated
with the memberships. The buyer accepted responsibility for all
membership contracts executed after March 15, 2000.
REAL ESTATE HELD FOR SALE BY LAKEWOOD RETREAT, INC.
On July 19, 2000, the Company entered into an agreement for the
sale of the real estate assets of Lakewood Retreat, Inc.
It is contemplated that the proceeds from this sale will be
utilized to satisfy both the Unicorn and Camplese debt
obligations. (see Notes 6, 9(U) and 9(V))
REAL ESTATE HELD FOR SALE - KIRKBRIDE CENTER
On August 24, 2000, the Company entered into a contract for the
sale of approximately 4.7 acres of land contiguous to the
Kirkbride Center. Consideration for this parcel is approximately
$2.2 million.
52
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
DEBT FORBEARANCE - ELLIOTT KREMMS
On June 30, 2000, the Company entered into a settlement agreement
due to defaults under a previously negotiated lease separation
agreement. (see Note 9(w)) The terms of the settlement call for
immediate payment of $5,000 with monthly payments of
approximately $6,500 for the following thirty months.
21. (UAUDITED) FOURTH QUARTER ADJUSTMENTS
As of December 31, 1999, the Company recorded certain adjustments
which increased net loss. These adjustments predominantly related
to accounts receivable reserves and fixed asset write downs (see
Note 2) are summarized below:
Net Income
(Decrease)
(in Thousands)
------------------------------------------
Receivable reserves $ (1,250)
Impaired asset write down (930)
Other, net (581)
------------------------------------------
$ (2,761)
==========================================
In addition to these adjustments, other adjustments were required
to properly reflect certain transactions in the first three
quarters of fiscal 1999. The Company plans to restate its Form
10-QSB filings in the near future to reflect these adjustments.
The adjusted net loss amounts, by quarter, are reflected below:
Fiscal 1999 As originally
Quarter reported Adjustments As Adjusted
(in Thousands) (in Thousands) (in Thousands)
----------------------------------------------------------------
First $ (1,660) $ (372) $ (2,032)
Second $ (768) $ (359) $ (1,127)
Third $ (369) $ (665) $ (1,034)
53
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
22. FINANCIAL STATEMENT RESTATEMENT
In connection with the preparation of the December 31, 1999
financial statements, the Company discovered that the financial
statements for the years ended December 31, 1998 and December 31,
1997 had not accounted for and reflected certain transactions and
events in accordance with generally accepted accounting
principles. It was determined that a restatement of the financial
statements was necessary and appropriate due primarily to the
following items:
<TABLE>
<CAPTION>
Year ended Year ended Prior to
December 31, December 31, January 1,
1998 1997 l997
----------------------------------------------
<S> <C> <C> <C>
Capitalization of certain
operating expenses $ (830,516) $ (1,237,500) $ -
Unrecorded charges
associated with the
issuance of options and
warrants in connection
with debt, forbearance
and services provided
by nonemployees (463,983) (1,011,499) (3,225,751)
Overaccrual of amounts due
Medicare 478,387 - -
Interest expense 287,594 5,041 (4,285)
Nonrecording of
impairment of
intangible assets (752,479) (225,000) -
Other 32,048 (436,193) (288,000)
----------------------------------------------
$ (1,248,949) $ (2,905,151) $ (3,518,036)
==============================================
</TABLE>
54
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The financial statements below represent the balances as
previously filed and as restated to give effect to those items
noted above, as well as, other less significant adjustments.
<TABLE>
<CAPTION>
BALANCE SHEET
ASSETS
December 31, 1998
----------------------------
As Previously
Reported As Restated
----------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 115,242 $ 115,242
Accounts receivable, net 4,411,418 4,356,935
Prepaid and other current assets 175,659 175,659
----------------------------------------------------------------
TOTAL CURRENT ASSETS 4,702,319 4,647,836
----------------------------------------------------------------
REAL ESTATE HELD FOR SALE 1,100,000 1,100,000
----------------------------------------------------------------
CONTRACT RIGHTS, net 265,300 517,620
----------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 14,151,787 12,367,076
----------------------------------------------------------------
OTHER ASSETS
Goodwill, net 1,705,231 1,780,361
Deferred finance costs, net 443,172 443,172
Security deposits 10,467 10,467
Restricted cash 207,041 232,041
Other 609,610 897,050
----------------------------------------------------------------
TOTAL OTHER ASSETS 2,975,521 3,363,091
----------------------------------------------------------------
TOTAL ASSETS $ 23,194,927 $ 21,995,623
================================================================
</TABLE>
55
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
---------------------------------------------
December 31, 1998
------------------------------
As Previously
Reported As Restated
-------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Lines of credit $ 4,308,703 $ 4,308,703
Current maturities of
Long-term debt 16,191,983 15,365,441
Lease termination fee payable 38,565 -
Obligations under capital lease - 106,814
Accounts payable 3,748,882 3,761,290
Advances, officers/stockholders 1,332,692 1,458,178
Accrued expenses 1,851,026 2,538,108
Payroll and payroll taxes payable 3,048,183 3,102,509
Due to Medicare 1,692,389 1,214,003
-------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 32,212,423 31,855,046
OBLIGATIONS UNDER CAPITAL LEASE, net of current maturities - 308,482
LONG-TERM LIABILITIES
Lease termination fee payable 93,467 -
Long-term debt 2,098,907 2,322,188
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES 34,404,797 34,485,716
-------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIENCY)
Preferred stock 17 17
Common stock 15,949 17,201
Additional paid-in capital 11,086,340 17,507,701
Accumulated (deficit) (22,312,176) (30,015,012)
-------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' (DEFICIENCY) (11,209,870) (12,490,093)
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) $ 23,194,927 $ 21,995,623
===========================================================================================
</TABLE>
56
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
-----------------------
Year ended
December 31, 1998
------------------------------------------
As Previously
Reported As Restated
--------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Patient services, net $ 16,457,451 $ 16,935,837
Management services 1,962,803 1,962,803
Health and fitness center 450,625 450,625
Rental income 1,078,016 1,055,788
--------------------------------------------------------------------------------------------------
TOTAL NET REVENUE 19,948,895 20,405,053
--------------------------------------------------------------------------------------------------
DIRECT COSTS
Patient services 8,884,360 8,884,360
Management services 842,438 842,438
Health and fitness center 278,774 274,201
--------------------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 10,005,572 10,000,999
--------------------------------------------------------------------------------------------------
GROSS MARGIN 9,943,323 10,404,054
--------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries and employee benefits 3,552,430 3,712,425
Selling and administrative 6,994,583 7,933,072
Amortization 2,423,054 2,200,610
Depreciation 482,360 580,066
Provision for bad debts 2,147,140 2,147,140
Impaired asset write down 369,380 1,121,859
--------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 15,968,947 17,695,172
--------------------------------------------------------------------------------------------------
(LOSS) FROM OPERATIONS (6,025,624) (7,291,118)
INTEREST EXPENSE 2,913,420 2,896,875
--------------------------------------------------------------------------------------------------
NET (LOSS) $ (8,939,044) $ (10,187,993)
==================================================================================================
(LOSS) PER SHARE OF COMMON STOCK (BASIC AND DILUTED) $ (.65) $ (.64)
==================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING USED IN COMPUTING LOSS PER SHARE (BASIC
AND DILUTED) 13,758,587 15,943,179
==================================================================================================
</TABLE>
57
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
BALANCE SHEET
-------------
ASSETS
December 31, 1997
----------------------------
As Previously
Reported As Restated
----------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 304,267 $ 304,268
Accounts receivable, net 2,575,473 2,575,475
Prepaid and other current assets 212,367 212,367
----------------------------------------------------------------
TOTAL CURRENT ASSETS 3,092,107 3,092,110
----------------------------------------------------------------
REAL ESTATE HELD FOR SALE 1,513,723 1,513,723
----------------------------------------------------------------
CONTRACT RIGHTS, net 548,663 545,311
----------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 10,727,385 9,532,669
----------------------------------------------------------------
OTHER ASSETS
Goodwill, net 1,801,155 2,561,460
Deferred finance costs, net 305,354 305,354
Security deposits 108,468 466
Restricted cash 197,394 222,394
Other 247,232 835,229
----------------------------------------------------------------
TOTAL OTHER ASSETS 2,659,603 3,924,903
----------------------------------------------------------------
TOTAL ASSETS $ 18,541,481 $ 18,608,716
================================================================
</TABLE>
58
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
---------------------------------------------
December 31, 1997
------------------------------
As Previously
Reported As Restated
--------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Lines of credit $ 1,582,240 $ 1,582,240
Current maturities of
Long-term debt 10,203,425 10,287,621
Lease termination fee payable 38,565 -
Obligations under capital lease 71,763 69,505
Accounts payable 2,275,442 2,275,443
Advances, officers/stockholders 1,013,428 1,474,734
Accrued expenses 2,091,675 2,565,646
Payroll and payroll taxes payable 1,688,105 1,688,105
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 18,964,643 19,943,294
LONG-TERM LIABILITIES
Lease termination fee payable 93,467 -
Long-term debt 2,192,798 2,231,745
--------------------------------------------------------------------------------
TOTAL LIABILITIES 21,250,908 22,175,039
--------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK 1,293,271 1,293,280
COMMON STOCK HELD AS COLLATERAL - 150,000
STOCKHOLDERS' (DEFICIENCY)
Preferred stock 26 17
Common stock 12,694 13,507
Additional paid-in capital 9,357,714 14,803,892
Accumulated (deficit) (13,373,132) (19,827,019)
--------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' (DEFICIENCY) (4,002,698) (5,009,603)
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) $ 18,541,481 $ 18,608,716
================================================================================
</TABLE>
59
<PAGE>
CORECARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
-----------------------
Year ended
December 31, 1997
---------------------------------
As Previously
Reported As Restated
-----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Patient services, net $ 7,670,834 $ 7,670,834
Management services 1,760,075 1,760,075
Health and fitness center 521,414 521,414
Rental income 512,861 512,860
-----------------------------------------------------------------------------------------
TOTAL NET REVENUE 10,465,184 10,465,183
-----------------------------------------------------------------------------------------
DIRECT COSTS
Patient services 4,753,042 4,892,620
Management services 254,269 242,662
Health and fitness center 304,055 309,584
-----------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 5,311,366 5,444,866
-----------------------------------------------------------------------------------------
GROSS MARGIN 5,153,818 5,020,317
-----------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries and employee benefits 2,716,304 2,709,879
Selling and administrative 3,730,504 5,207,389
Amortization 677,067 773,887
Depreciation 279,546 483,342
Provision for bad debts 590,656 590,656
Impaired asset write down - 225,000
-----------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 7,994,077 9,990,153
-----------------------------------------------------------------------------------------
(LOSS) FROM OPERATIONS (2,840,259) (4,969,836)
-----------------------------------------------------------------------------------------
NONOPERATING EXPENSES
Interest expense 1,844,284 2,619,858
Factor fees 281,533 281,533
-----------------------------------------------------------------------------------------
TOTAL NONOPERATING EXPENSES 2,125,817 2,901,391
-----------------------------------------------------------------------------------------
NET (LOSS) $ (4,966,076) $ (7,871,227)
=========================================================================================
(LOSS) PER SHARE OF COMMON STOCK (BASIC AND DILUTED) $ (.44) $ (.69)
=========================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING USED IN COMPUTING LOSS PER SHARE (BASIC
AND DILUTED) 11,326,617 11,473,740
=========================================================================================
</TABLE>
60
<PAGE>
