SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 OR 15 (d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1996
Commission file number 0-11895
CONTINENTAL HEALTH AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2362097
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
910 Sylvan Avenue
Englewood Cliffs, NJ 07632
(Address of principal executive offices)
Registrant's telephone number, including area code (201) 567 - 4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such short period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of November 6, 1996, the Registrant had outstanding 9,291,166 shares of
its $.01 par value Common Stock.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Index
Page Number
PART I - FINANCIAL INFORMATION:
Item 1 Consolidated Balance Sheets September 30, 1996 (Unaudited)
and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations (Unaudited) for the three
months ended September 30, 1996 and 1995 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows (Unaudited) for the three
months ended September 30, 1996 and 1995 . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Financial Statements . . . . . . 5 - 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . .7 - 10
PART II - OTHER INFORMATION 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<S> <C> <C>
September 30 June 30,
Assets 1996 1996
(Unaudited)
Current assets:
Cash and cash equivalents $1,211 $2,900
Patients' funds 190 184
Accounts receivable, net of allowances for
uncollectible accounts of $4,370 and $4,193 11,876 10,177
Inventories 2,339 1,996
Deferred income taxes 822 822
Prepaid expenses and other current assets 1,775 1,151
Total current assets 18,213 17,230
Property and equipment, at cost, net of accumulated
depreciation and amortization of $4,747 and $4,363 54,211 54,453
Deferred income taxes 52 52
Other assets 3,651 3,837
Total assets $76,127 $75,572
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $103 $128
Current portion of long-term debt 2,811 3,355
Accounts payable 7,737 7,913
Other current liabilities 6,769 5,789
Total current liabilities 17,420 17,185
Long-term debt, net of current portion 50,799 50,574
Deferred income 40 72
Other liabilities 8 16
Minority interest in subsidiary 2,142 2,029
Mandatorily redeemable preferred stock
(includes $216 current portion) 3,500 3,500
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.02 par value; $100 liquidation
preference; 1,000,000 shares authorized;
13,884 shares outstanding 1 1
Common stock, $.02 par value; 15,000,000 shares
authorized; 9,288,716 and 9,286,216 shares
outstanding 188 186
Additional paid-in capital 21,438 21,470
Accumulated deficit (19,409) (19,461)
Total stockholders' equity 2,218 2,196
Total liabilities and stockholders' equity $76,127 $75,572
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
(Unaudited)
Three months ended September 30,
<S> <C> <C>
1996 1995
Revenues:
Nursing home services $12,012 $9,336
Infusion therapy and other medical services 6,782 6,302
Total revenues 18,794 15,638
Operating expenses:
Personnel 8,777 7,442
Medical and nutritional product 3,123 3,218
Health care and lodging 2,564 2,735
Selling, general and administrative 1,654 1,501
Provision for uncollectible accounts 249 432
Depreciation and amortization 491 176
Total operating expenses 16,858 15,504
Income from operations 1,936 134
Interest and dividend income 29 91
Interest and other financing costs (1,719) (242)
Other income, net 108 314
Minority interest in loss (earnings)
of subsidiary (113) (87)
Income before income taxes 241 210
Provision for income taxes 189 --
Net income 52 210
Preferred dividends (35) (35)
Net income available to common
shareholders $17 $175
Earnings per share:
Net income available to common
shareholders $0.00 $0.02
Weighted average number of common and
common equivalent shares 9,783,350 7,941,409
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
(Unaudited)
Three months ended
September 30,
<S> <C> <C>
1996 1995
Operating activities:
Net income $52 $210
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 491 176
Amortization of deferred financing costs 43 15
Provision for uncollectible accounts 249 432
Amortization of deferred income (32) (292)
Provision for deferred income taxes 189 --
(Gain) loss on foreign currency debt (77) (24)
Minority interest 113 87
Increase (decrease) in cash due to changes in:
Accounts receivable (1,948) (1,394)
Inventories (343) 144
Prepaid expenses and other current assets (624) (434)
Other assets 143 (19)
Accounts payable (176) 1,206
Other current liabilities 796 663
Other liabilities (8) (244)
Net cash provided by (used in) operating
activities (1,132) 526
Investing activities:
Expenditures for property and equipment (249) (99)
Net cash provided by (used in) investing
activities (249) (99)
Financing activities:
Conversion of trade payables into notes 904 --
Net proceeds from long-term borrowings -- 515
Payments of short-term borrowings (492) (736)
Payments of long-term borrowings (685) (114)
Payment of preferred dividends (35) (35)
Net cash used in financing activities (308) (370)
Net increase (decrease) in cash and
cash equivalents (1,689) 57
Cash and cash equivalents, beginning of the period 2,900 546
Cash and cash equivalents, end of the period $1,211 $603
Supplemental disclosure of cash flow data:
Interest paid $1,276 $100
Income taxes paid $53 $0
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
(Unaudited)
Notes to Consolidated Financial Statements
1. The Company
The Company's operations consist primarily of nursing home services and
infusion therapy and other medical services. Nursing home services include
the ownership, leasing, operation and management of nursing homes.
Infusion therapy and other medical services include enteral and other
medical services, primarily for patients in nursing homes, and intravenous
and other infusion therapies for patients at home and in nursing homes.
The Company is subject to certain risks and uncertainties as a result of
changes that could occur in the healthcare industry, including Medicare and
Medicaid reimbursement rates.
2. Basis of Presentation
The consolidated financial statements include the accounts of Continental
Health Affiliates, Inc. ("Continental") and its subsidiaries (the
"Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Continental owns 59% of the common stock of Infu-Tech, Inc. ("Infu-Tech");
the other 41% is publicly traded. The minority interest in the
consolidated financial statements represents the minority stockholders'
proportionate share of equity in Infu-Tech.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accrual
adjustments, considered necessary for a fair presentation have been
included. In addition, during the quarter, management reviewed various
estimates of certain liabilities and the adequacy of bad debt provisions
and recorded an aggregate of $312,000 as credits. These are discussed in
the management discussion and analysis section.
Operating results for the three month period ended September 30, 1996, are
not necessarily indicative of the results that may be expected for year end
June 30, 1997.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
3. Subsequent Event
On October 4, 1996, the Company completed an exchange offer to holders of
its 14 % Subordinated Debentures that were due on September 1, 1996. The
Company offered for each $1,000 principal amount of subordinated debentures
a share of a new 11% convertible Preferred Stock with a liquidation
preference of $1,000. Of the total of $1.2 million subordinated debentures
outstanding, $474,000 principal elected to exchange into Series A 11%
Convertible Preferred Stock.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
(Unaudited)
Notes to Consolidated Financial Statements
The new Preferred Stock will be convertible for three years into
Continental Health common stock which, at the time of conversion, has a
market value totalling 110% of the liquidation preference of the Preferred
Stock. After the three years, the Preferred Stock will be convertible into
common stock which has a market value totalling 100% of the liquidation
preference of the Preferred Stock. Holders of the Preferred Stock will be
entitled to dividends totalling $110 per share per year, equal to 11% of
the liquidation preference of the Preferred Stock. After three years,
Continental Health will have the right either to (1) redeem the Preferred
Stock for $1,000 per share or (2) convert the outstanding Preferred Stock
into Continental Health common stock which has a market value at the time
of conversion equal to 100% of the liquidation preference of the Preferred
Stock.
4. Cash and Cash Equivalents
Cash and cash equivalents at September 30, 1996 and June 30, 1996 includes
$1,094,000 and $691,000 respectively, held by Infu-Tech. In connections
with Infu-Tech's initial public offering, a management and
non-competition agreement between Continental and its 59% owned subsidiary,
Infu-Tech, expiring September 30, 1997, prohibits Infu-Tech from lending
money to (or borrowing money from) Continental and its other subsidiaries
subsequent to December 31, 1992.
The Company classifies all highly liquid investments with maturities of
three months or less when purchased as cash equivalents.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Results of Operations
Three Months Ended September 30, 1996 and 1995 (Unaudited)
Total revenues were $3,156,000, or 20% higher for 1996 compared to 1995 in
part because of revenues of $2,681,000 pertaining to the Heritage Facility
acquired in October 1995. Revenues were negatively impacted by $535,000
attributable to the low census at the West Palm Beach, Florida nursing home
as a result of a suspension of admissions which was removed in May 1996 and
low occupancy during the summer in Florida.
Nursing home services revenues increased by $2,676,000, or 29%. Excluding
revenues pertaining to the Heritage Facility, nursing home services
revenues decreased by $5,000.
Infusion therapy and other medical services revenues increased by $480,000,
or 8%, from $6,302,000 in 1995 to $6,782,000 in 1996, primarily due to a
$168,000, or 4%, increase in home infusion division revenues which was
caused by a 11% increase in the number of patients serviced with improved
pricing.
Due to the passage of time, it appeared that claims, against which the
Company had established reserves, would not be made. Accordingly, during
the quarter, the Company extinguished the reserves, resulting in $167,000
in revenue in the quarter.
Personnel costs increased by $1,335,000, or 18%. Excluding the Heritage
Facility, personnel costs decreased by $102,000, or 1%.
Costs of medical and nutritional products sold to patients and other
customers decreased by $95,000, or 3%, from $3,218,000 in 1995 to
$3,123,000 in 1996. As a percentage of infusion therapy and other medical
services revenues, medical and nutritional product costs was 46% in 1996
and 51% in 1995. Infu-Tech is participating in group purchasing programs
that make bulk purchases more economical and the cost of nutritional
product for the quarter was based upon a physical inventory count at
September 30, 1996.
Health care and lodging expenses, which are incurred in connection with
nursing home services, decreased by $171,000 or 6% due to a $749,000
decrease of rent expense as a result of the acquisition of nursing homes
which were previously leased, offset by expenses of the Heritage Facility.
Excluding the Heritage Facility, health care and lodging expenses decreased
by $688,000 or 25%.
Selling, general and administrative costs increased by $153,000 or 10%.
Excluding the Heritage Facility, selling, general and administrative costs
increased by $87,000, or 6% primarily due to an increase in legal fees and
the engagement of an investor relations firm.
The provision for uncollectible accounts was 1.3% of revenues in 1996 and
2.8% in 1995. The reduced provision included the effects of a $146,000
reduction in the reserve for uncollectible accounts as a result of revised
estimates of collectibility.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
As a result of the acquisition of four facilities in the October 31, 1995
refinancing, depreciation and amortization expenses increased by $315,000
and interest and other financing costs increased by $1,477,000.
Other income of $108,000 in 1996 consisted of amortization of deferred
income of $32,000 and an unrealized foreign currency translation gain of
$76,000. Other income of $314,000 in 1995 consisted of amortization of
deferred income of $290,000 and an unrealized foreign currency translation
gain of $24,000.
Minority interest in profit of subsidiary of $113,000 in 1996 and $87,000
in 1995 represents the portion of the net income of Infu-Tech allocable to
minority stockholders.
The provision for income taxes in fiscal 1996 reflects the utilization of
the Company's net operating losses in the prior fiscal year.
The preferred stock dividend related to 5% exchangeable preferred stock.
Dividends on subsidiaries' preferred stock issued as part of the October
31, 1995 refinancing are accounted for under interest and financing costs.
The net income for the quarter was negatively impacted due to the low
occupancy rate at the Company's West Palm Beach, Florida, long term care
facility. Its operating loss was $391,000. On the other hand, during the
quarter, the adjustments in the accounts receivable reserves and related
liabilities, as discussed above, increased first quarter consolidated
results by $312,000.
The net income available to common shareholders in 1996 was $17,000 or 0
cents per share compared to net income available to common shareholders in
1995 of $175,000 or 2 cents per share.
Liquidity and Capital Resources
At September 30, 1996, the Company had stockholders' equity of $2,218,000
and total liabilities of $71,767,000. The total liabilities at September
30, 1996 included debt of $54,299,000, which included SFr 735,795
(approximately $494,000) principal amount of 6% Swiss franc denominated
convertible bonds which remain unpaid although they matured on June 27,
1995 (the "Bonds"); SFr 619,500 (approximately $494,000) principal amount
of 8% Swiss franc denominated bonds due June 27, 1998; $272,000 principal
amount of a secured loan ("Secured Loan") due November 1997; $1,213,000
principal amount of 8% notes due 1999; and $3,400,000 principal amount of
6% notes due 2003.
On October 4, 1996, an Exchange Offer made by the Company to exchange
shares of a new 11% Convertible Preferred Stock for all its remaining 14-1/8%
Subordinated Debentures due September 1, 1996 expired. $474,000 face
amount of debentures were exchanged and $474,000 was returned to the
Company from the escrow account which had been established with the Trustee
to repay the holders.
On October 31, 1995, the Company made a 15 year borrowing of $41.0 million
secured by mortgages on four of the Company's nursing homes and a five year
borrowing of $1.5 million secured by 8 acres of land in West Orange, New
Jersey. In addition, four subsidiaries of the Company sold preferred stock
for a total of $3.5 million. The $46.0 million borrowing (three of which
previously had been operated by the Company under leases and the fourth of
which the Company had sold in 1990 and managed under
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
a management contract since then) and to repay $301,000, and extend the
balance of a $601,000 secured note which would have matured in December
1995. At the same time, the Company converted $1,476,000 of trade payables
into a three year note. Subsequently, in September 1996 the Company
converted an additional $904,467 of trade payables into one to three year
notes. The current portion of the total borrowings issued on October 31,
1995 totals $1.2 million.
When the Bonds matured on June 27, 1995, SFr 2,900,000 (approximately
$2,525,000) principal amount, together with accrued interest of SFr 174,000
(approximately $152,000), was outstanding. Between June 30, 1995 and June
30, 1996, the Company acquired SFr 2,164,000 principal amount of Bonds,
including accrued interest on those Bonds, for a total of SFr 1,122,375 and
$315,000 plus a SFr 619,500 note maturing in June 1998. In September 1996,
the Company deposited $78,000 with its agent in Switzerland against SFr
85,000 principal amount of Bonds (with interest) being redeemed.
The Company's cash and cash equivalents balance decreased from $2,900,000
at June 30, 1996 to $1,211,000 at September 30, 1996. Included in the
September 30, 1996 balance is $1,094,000 held by Infu-Tech. In connections
with the initial public offering of Infu-Tech common stock, the Company
entered into a management and non-competition agreement with Infu-Tech,
expiring September 30, 1997, which prohibits Infu-Tech from lending money
to (or borrowing money from) the remainder of the Company.
The Company in total used $1,132,000 of cash in operating activities
primarily due to an increase in accounts receivable of $1,948,000, an
increase in prepaid and other current assets of $624,000, a decrease in
accounts payable of $176,000 offset by an increase in other current
liabilities of $796,000 and net income of $52,000. Of the $1,948,000
increase in accounts receivable, $1,041,000 is attributable to Infu-Tech.
At September 30, 1996, the balance in net accounts receivable for Infu-Tech
was 13% higher than the balance at June 30, 1996. Infu-Tech's overall
outstanding net accounts receivable has increased from 84 days sales at
June 30, 1996 to 91 days sales at September 30, 1996, primarily as a result
of a slow down in payments from Medicare and managed care companies.
Medicare payments have been delayed due to changes in reimbursement
policies, while managed care companies have experienced delays in
processing payments due to a higher volume of claims. As a result, Infu-
Tech has experienced increased delays in having its claims processed as
well as an increase in the number of initial claims rejected. This is an
industry-wide problem and Infu-Tech believes that claims processing will
improve and the days' sales outstanding of accounts receivable will
decrease as these problems are resolved. The increase in accounts
receivable attributable to the nursing home division was due to an accrual
of retroactive Medicare payments resulting from anticipated rate
adjustments. The Company (excluding Infu-Tech) used $1,566,000 of cash in
operating activities.
The Company has no arrangements under which it can make borrowings. At
September 30, 1996, the Company had working capital of $793,000. Excluding
Infu-Tech, which had working capital of $4.9 million, the Company's working
capital was a deficit of $4,145,000. Further, at September 30, 1996, Infu-
Tech's cash and cash equivalents of $1,094,000 were $403,000 more than the
balance of $691,000 at June 30, 1996 and its accounts payable of $3,735,000
were $956,000 higher than the $2,779,000 at June 30, 1996.
During the quarter ended September 30, 1996, the Company repaid $685,000 of
long-term borrowings and paid preferred dividends of $35,000.
At September 30, 1996, the Company had approximately $2.8 million of debt
due in 1997 primarily
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
relating to the Nomura financing debt (the October 1995 loan used to
acquire four nursing homes). In November 1996, the Company will begin to
make mandatory redemption payments of its subsidiaries' Preferred Stock of
$73,000 per month (principal and interest).
The Company does not have any material commitments for capital
expenditures.
The Company believes that it will be able to generate sufficient funds to
meet ongoing obligations from operating cash flow or the realization of
assets into cash.
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Part II Other Information
Item 1 Legal Proceedings
The action entitled Rubin v. Continental Health Affiliates as
reported in the annual report on Form 10-K (item 3) for the year
ended June 30, 1996, has been settled. The settlement does not
have a material adverse effect upon the Company's financial
condition or results of operations.
The West Palm Beach, Florida nursing home was re-surveyed in
October 1996 and found to be in substantial compliance thereby
abrogating further regulatory action. Settlement of a proposed
fine recommended by the State agency because of prior state
survey deficiencies would not have a material adverse effect
upon the Company's financial condition or results of operations.
Item 2 Changes in Securities NONE
Item 3 Defaults Upon Senior Securities NONE
Item 4 Submission of Matters to Vote of Security Holders NONE
Item 5 Other Information NONE
Item 6 Exhibits and Reports on Form 8-K
A. Exhibits - The following exhibits are filled herewith or
incorporated herein.
.1 Calculation of earnings per share - three months ended
September 30, 1996.
.2 Calculation of earnings per share - three months ended
September 30, 1995.
B. Reports on Form 8-K during the quarter ended September 30,
1996: NONE
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Continental Health Affiliates, Inc.
Date November 18, 1996 /s/ Jack Rosen
Jack Rosen
Chairman and Director
(Chief Executive Officer)
Date November 18, 1996 /s/ S. Colin Neill
S. Colin Neill
Vice President and
Chief Financial Officer
<PAGE>
Exhibit A.1
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share (Unaudited)
Three Months ended September 30, 1996
Primary
Net income available to common shareholders $ 17,000
Adjustment of shares outstanding:
Weighted average number of shares outstanding 9,288,216
Average net additional equivalent shares issuable 495,134
Weighted average number of common shares and common
shares equivalent 9,783,350
Earnings per share $ 0
<PAGE>
Exhibit A.2
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share (Unaudited)
Three Months ended September 30, 1995
Primary
Net income available to common shareholders $ 175,000
Adjustment of shares outstanding:
Weighted average number of shares outstanding 7,941,409
Average net additional equivalent shares issuable ---
Weighted average number of common shares and common
shares equivalent 7,941,409
Earnings per share $ 0.02
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 1,211,000
<SECURITIES> 0
<RECEIVABLES> 16,246,000
<ALLOWANCES> 4,370,000
<INVENTORY> 2,339,000
<CURRENT-ASSETS> 18,213,000
<PP&E> 58,958,000
<DEPRECIATION> 4,747,000
<TOTAL-ASSETS> 76,127,000
<CURRENT-LIABILITIES> 17,420,000
<BONDS> 50,799,000
3,500,000
1,000
<COMMON> 188,000
<OTHER-SE> 2,029,000
<TOTAL-LIABILITY-AND-EQUITY> 76,127,000
<SALES> 18,794,000
<TOTAL-REVENUES> 18,794,000
<CGS> 3,123,000
<TOTAL-COSTS> 16,858,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 249,000
<INTEREST-EXPENSE> 1,719,000
<INCOME-PRETAX> 241,000
<INCOME-TAX> 189,000
<INCOME-CONTINUING> 52,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
