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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997
Commission File Number 0-11895
CONTINENTAL HEALTH AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2362097
(State of other juris(I.R.S. Employer Identification Number)
incorporation or organization)
910 Sylvan Avenue, Englewood Cliffs, NJ 07632
(Address of principal executive offices)
(201) 567-4600
Registrant's telephone number, including area code
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 10, 1997, the Registrant had outstanding 10,120,151
shares of its $.02 par value Common Stock.
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1
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CONTINENTAL HEALTH AFFILIATES, INC.
Index
Part I - Financial Information:
Page
Item 1
Consolidated Balance Sheets at September 30, 1997 (Unaudited)
and June 30, 1997.....................................................
Consolidated Statements of Operations (Unaudited) for the three months
ended September 30, 1997 and 1996.....................................
Consolidated Statements of Cash Flows (Unaudited) for the three months
ended September 30, 1997 and 1996.....................................
Notes to Unaudited Consolidated Financial Statements....................
Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................
Part II - Other Information.....................................................
Signatures..............................................................
2
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<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Balance Sheets
(Dollars in thousands)
September 30, June 30,
1997 1997
(Unaudited )(Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents...............................................$ 1,768 $ 3,796
Patients' funds......................................................... 150 188
Accounts receivable, net of allowances for uncollectible accounts
of $4,063 and $4,252.................................................. 13,470 13,346
Inventories............................................................. 1,882 1,861
Deferred income taxes................................................... 702 702
Prepaid expenses and other current assets............................... 960 803
----------- ---------
Total current assets................................................ 18,932 20,696
Property and equipment, at cost, net of accumulated depreciation
and amortization of $5,269 and $4,363................................... 46,886 46,991
Goodwill, net of accumulated amortization................................. 136 139
Other assets.............................................................. 3,619 3,524
----------- ---------
Total assets........................................................$ 69,573 $ 71,350
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings...................................................$ 100 $ 105
Current portion of long term debt....................................... 4,288 5,686
Income taxes payable.................................................... 446 437
Accounts payable........................................................ 9,669 9,696
Other current liabilities............................................... 3,388 4,260
----------- ---------
Total current liabilities........................................... 17,891 20,184
Long-term debt, net of current portion ................................... 41,780 41,129
Mandatorily redeemable preferred stock (includes $948 current portion).... 1,770 1,989
----------- ---------
Total liabilities................................................... 61,441 63,302
============ ==========
Minority interest in subsidiary ........................................ 2,489 2,424
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.02 par value; $100 liquidation preference; 1,000,000
shares authorized; 13,884 shares outstanding ......................... 1 1
Series A 11% Convertible Preferred stock $.02 par value, $1,000 liquidation
preference, 34 shares outstanding.................................... . 34 34
Common stock, $.02 par value; 15,000,000 shares authorized; 10,120,151
and 10,119,101 shares outstanding .................................... 206 206
Additional paid-in capital.............................................. 23, 366 23,401
Accumulated deficit..................................................... (17,964) (18,018)
------------- ----------
Total stockholders' equity.......................................... 5,643 5,624
----------- ---------
Total liabilities and stockholders' equity..........................$ 69,573 $ 71,350
============ ==========
See accompanying notes to consolidated financial statements
3
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<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Three Months Ended September 30,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Revenues:
Nursing home services..................................................$ 9,255 $ 12,012
Infusion therapy and other medical services.......................... 7,002 6,782
--------- ---------
Total revenues................................................ 16,257 18,794
--------- ----------
Personnel............................................................ 6,981 8,777
Medical and nutritional product...................................... 3,645 3,123
Health care and lodging.............................................. 2,193 2,564
Selling, general and administrative.................................. 1,665 1,654
Provision for uncollectible accounts................................. 115 249
Depreciation and amortization........................................ 362 491
--------- ---------
Total operating expenses...................................... 14,961 16,858
--------- ---------
Income from operations........................................ 1,296 1,936
Interest and dividend income........................................... 16 29
Interest and other financing costs..................................... (1,285) (1,719)
Other income (expense), net............................................ 204 108
Minority interest in earnings of subsidiary............................ (65) (113)
--------- ----------
Income before income taxes .................................... 166 241
Provision for income taxes............................................. 112 189
--------- ---------
Net income .................................................... 54 52
--------- ---------
Preferred dividends.................................................... (35) (35)
--------- ---------
Net income available to common shareholders...................$ 19 $ 17
========= =========
Net income available to common shareholders........................$ 0.00 $ 0.00
========= =========
Weighted average number of common and common equivalent shares........10,629,400 9,783,350
See accompanying notes to consolidated financial statements
</TABLE>
4
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<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended September 30,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Operating activities:
Net income.........................................................$ 54 $ 52
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation expense......................................... 362 491
Amortization of deferred financing costs..................... 65 43
Provision for uncollectible accounts......................... 115 249
Amortization of deferred income taxes........................ -- (32)
Provision for deferred income................................ -- 189
(Gain) loss on translation of foreign currency debt.......... 4 (77)
Minority interest............................................ 65 113
Increase (decrease) in cash from changes in:
Patient funds............................................... 38 --
Accounts receivable......................................... (239) (1,948)
Inventories................................................. (21) (343)
Prepaid expenses and other current assets................... (157) (624)
Other assets................................................ (160) 143
Taxes payable............................................... 9 --
Accounts payable............................................ (27) (176)
Other current liabilities................................... (873) 796
Other liabilities........................................... -- (8)
----------- -----------
Net cash (used in) operating activities........................ (765) (1,132)
----------- ------------
Investing activities:
Expenditures for property and equipment ........................... (257) (249)
----------- -----------
Net cash used in investing activities.......................... (257) (249)
----------- -----------
Financing activities:
Conversion of trade payables into notes............................ -- 904
Payment on mandatorily redeemable preferred stock.................. (219) --
Payments on debt................................................... (752) (1,177)
Payment of preferred dividends..................................... (35) (35)
----------- -----------
Net cash (used in ) provided by financing activities........... (1,006) (308)
------ ----- ------------
(Continued on next page)
</TABLE>
5
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6
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<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended September 30,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Net (decrease ) increase in cash and cash equivalents................$ (2,028)$ (1,689)
Cash and cash equivalents, beginning of period....................... 3,796 2,900
------------ ------------
Cash and cash equivalents, end of period.............................$ 1,768 $ 1,211
============ ============
Supplemental disclosure of cash flow data:
Interest paid....................................................$ 1,158 $ 1,276
============ ============
Income taxes paid................................................$ 105 $ 53
=========== ============
See accompanying notes to consolidated financial statements
</TABLE>
7
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CONTINENTAL HEALTH AFFILIATES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. The Company
The Company's operations consist primarily of nursing home and assisted
living services, infusion therapy and other medical services.
Nursing home and assisted living services include the ownership,leasing,
operation and management of nursing homes and assisted living facilities.
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 58% of the common stock of Infu-Tech, Inc. ("Infu-Tech");
42% of the common stock of Infu-Tech 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.
Operating results for the three month period ended September 30, 1997, are
not necessarily indicative of the result that may be expected for year end
June 30, 1998.
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, 1997.
3. Cash and Cash Equivalents
Cash and cash equivalents at September 30, 1997 and June 30, 1997 includes
$197,000 and $512,000 respectively, held by Infu-Tech. A management and
non-competition agreement between Continental and Infu-Tech, which, as
extended, expires September 30, 2000, prohibits Infu-Tech from lending money
to (or borrowing money from) Continental
The Company classifies all highly liquid investments with maturities of
three months or less when purchased as cash equivalents.
8
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CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. 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, 1997 Compared with Three Months Ended
September 30, 1996
Total revenues were $2,537,000, or 14% lower for 1997 compared with 1996,
primarily due to the sale of two facilities whose revenues were included in the
prior period.
Infusion therapy and other medical services revenues increased by $220,000 or
3%, from $6,782,000 in 1996 to $7,002,000 in 1997.
Personnel costs decreased by $1,796,000, or 21%. The reduction is primarily
attributable to the sale of two facilities in June 1997, together with overall
reduction in staff in the nursing home division. These reductions where
partially offset by the addition of personnel in branch and corporate operations
and the establishment of the Disease State Management division at Infu-Tech.
Costs of medical and nutritional products sold to patients and other customers
increased by $522,000 or 17%, from $3,123,000 in 1996 to $3,645,000 in 1997. As
a percentage of infusion therapy and other medical services revenues, medical
and nutritional product costs were 52% in 1997 and 46% in 1996. The increase in
the medical and nutritional product costs as a percentage of sales is primarily
attributable to Infu-Tech's increased revenues associated with Ceredase, a high
cost drug, a capitation agreement, and margin reductions from operating in a
managed care environment.
Health care and lodging expenses, which are incurred in connection with nursing
home services, decreased by $371,000 or 14%, primarily as a result of the sale
of the two facilities.
Selling, general and administrative costs increased by $11,000 or 1% due to
increased expenses attributable to costs connected with the development of
Infu-Tech's disease state management program offset by the saving of expenses
from the two facilities sold.
The provision for uncollectible accounts is 1% of revenues in 1997 and 1996.
Beginning in the quarter ended March 31, 1997, Infu-Tech reviewed its allowance
for uncollectible accounts in light of Infu-Tech's changed payor mix.
Infu-Tech's business focus is on managed care relationships which now account
for 73% of its payor mix. The managed care relationships are generally governed
by contracts which provide for payment within defined terms. Infu-Tech's
collection experience for these contracts has been good and greatly improved
from the historical collection experience upon which the allowance for
uncollectible accounts had been established. Based on this analysis Infu-Tech
has charged a lower provision rate against sales for fiscal 1998.
Other income (expense) net, of $204,000 in 1997 resulted from the re-evaluation
of accounts payables of $208,000 offset by an unrealized foreign currency
translation loss of $4,000. 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.
Minority interest in earnings of subsidiary of $65,000 in 1997 and $113,000 in
1996 represents the portion of the net income of Infu-Tech allocable to minority
stockholders.
9
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CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. Management 's Discussion and Analysis of Financial Condition and Results
of Operations
The provision for income taxes of $112,000 in 1997 and $189,000 in 1996 reflects
a full tax charge for Infu- Tech, a 58% owned subsidiary which files its own
federal tax return.
The preferred stock dividend does not include the dividend paid on mandatorily
redeemable preferred stock issued as part of the October 31, 1995 refinancing
which is accounted for under interest and financing costs.
The net income available to common shareholders in 1997 was $19,000 or $.00
cents per share compared to net income available to common shareholders in 1996
of $17,000 or $.00 cents per share.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had stockholders' equity of $5,643,000 and
total liabilities of $61,441,000. At September 30, 1997 debt amounted to
$47,838,000. On October 31, 1995 the Company purchased four homes secured by a
15 year borrowing of $41 million . In June 1997, the Company sold one of the
facilities and paid off its proportionate share of the debt. On September 30,
1997 the balance of the 15 year borrowing was $36,805,000.
On October 31, 1995, subsidiaries of the Company sold preferred stock for a
total of $3.5 million. In June 1997 when one of the subsidiaries sold the
facility it had owned, a portion of the proceeds were used to redeem a portion
of the preferred stock. As of September 30, 1997 the preferred stock outstanding
was $1,770,000.
On October 31, 1995 as part of the refinancing of the facilities, the Company
entered into a 5 year borrowing of $1.5 million secured by 8 acres of land in
West Orange, New Jersey. In December 1996, the Company sold the land, paid down
the loan to $454,000 and substituted a pledge of Infu-Tech stock as collateral
for the loan. As of September 30, 1997, the loan balance was $297,000. The
Company has the right to prepay the loan by December 1997 and receive
a $150,000 credit, which it intends to do.
During October 1995, the Company converted $1,476,000 of trade payables into a
three year note. As of September 30, 1997, the loan balance was $409,000.
During September 1996, the Company converted additional trade payables of
$904,000 into one to three year notes. As of September 30, 1997 the loan balance
was $115,000.
Debt also includes a mortgage secured by a facility of $2,196,000 due October
1, 1997. This mortgage is being extended while refinancing is completed.
Other debt included SFr 643,820 (approximately $443,000) principal amount of
6% Swiss franc denominated bonds which remain unpaid although they matured on
June 27, 1995 (the "Bonds"); SFr 619,500 (approximately $426,000) principal
amount of 8% Swiss franc denominated bonds due June 27, 1998; $1,213,000
principal amount of 8% notes due 1999; and $3,400,000 principal amount of 6%
notes due 2003.
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. As of June 30, 1997 the Company had
acquired an additional SFr 85,000 principal amount of bonds(with interest) for
$78,000.
10
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CONTINENTAL HEALTH AFFILIATES, INC.
Item 2. Management 's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's cash and cash equivalents balance decreased from $3,796,000 at
June 30, 1997 to $1,768,000 at September 30, 1997. Included in the September 30,
1997 balance is $197,000 held by Infu- Tech. A management and non-competition
agreement with Infu-Tech, which, as extended, expires September 30, 2000,
prohibits Infu-Tech from lending money to (or borrowing money from) the
remainder of the Company.
The Company in total used $764,000 of cash in operating activities primarily
due to a decrease in other current liabilities of $873,000 offset by net income
of $54,000.
At September 30, 1997, the balance in net accounts receivable for Infu-Tech
was 3% higher than the balance at June 30, 1997. Infu-Tech's net accounts
receivable has remained relatively constant at 104 days sales at September 30,
1997, primarily as a result of continued slow 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 their higher volume of claims.
The Company has no arrangements under which it can make borrowings. At
September 30, 1997, the Company had working capital of $1,041,000. Excluding
Infu-Tech, which had working capital of $5 million, the Company had a working
capital deficit of $3,924,000. Further, at September 30, 1997, Infu-Tech's cash
and cash equivalents of $197,000 were $315,000 less than the balance of $512,000
at June 30, 1997 and its accounts payable of $4,535,000 were $247,000 higher
than the balance at June 30, 1997.
During the three months ended September 30, 1997, the Company repaid $752,000
of debt, redeemed $219,000 of mandatorily redeemable preferred stock and paid
preferred stock dividends of $35,000.
While the Company continues to experience cash flow constraints, it
continues to use a combination of operating cash flow and realization of assets
into cash as a means of meeting ongoing obligations. It has significant assets
which can be used for this purpose if needed.
11
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CONTINENTAL HEALTH AFFILIATES, INC.
Part II - Other Information
Item 1. Legal Proceedings
Presently, there are no pending material legal proceedings
other than as reported in the Company's Form 10-K for the
year ended June 30, 1997.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
The following exhibits are filled herewith or
incorporated herein.
1 Calculation of earnings per share - three months
ended September 30, 1997.
2 Calculation of earnings per share - three months
ended September 30, 1996.
B. Reports on Form 8-K during the quarter ended
September 30, 1997
None
12
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<CAPTION>
Exhibit A.1
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share
Three months ended September 30, 1997
(Unaudited)
Primary
<S> <C>
Net income available to common shareholders..............................$ 19,000
==========
Adjustment of shares outstanding:
Weighted average number of shares outstanding...................... 10,120,950
Average net additional equivalent shares issuable.................. . 508,449
-----------
Weighted average number of common shares and common shares equivalent .. 10,629,399
===========
Earnings per share.......................................................$ 0.00
===========
</TABLE>
13
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<TABLE>
<CAPTION>
Exhibit A.2
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share
Three months ended September 30, 1996
(Unaudited)
Primary
<S> <C>
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..............................................................$ 0.00
=============
</TABLE>
14
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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 14, 1997 /S/ JACK ROSEN
---------------------------------- --------------
Jack Rosen
Chairman and Director
(Chief Executive Officer)
Date: November 14, 1997 /S/ ALLISON K. ALLEN
---------------------------------- --------------------
Allison K. Allen
Principal Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000354761
<NAME> CONTINENTAL HEALTH AFFILIATES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,768
<SECURITIES> 0
<RECEIVABLES> 17,533
<ALLOWANCES> 4,063
<INVENTORY> 1,882
<CURRENT-ASSETS> 18,932
<PP&E> 52,155
<DEPRECIATION> 5,269
<TOTAL-ASSETS> 69,573
<CURRENT-LIABILITIES> 17,891
<BONDS> 0
1,770
35
<COMMON> 206
<OTHER-SE> 5,402
<TOTAL-LIABILITY-AND-EQUITY> 69,573
<SALES> 16,257
<TOTAL-REVENUES> 16,257
<CGS> 3,645
<TOTAL-COSTS> 14,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 1,285
<INCOME-PRETAX> 166
<INCOME-TAX> 112
<INCOME-CONTINUING> 54
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> .00
<EPS-DILUTED> 0
</TABLE>
