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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997.
Commission file number: 0-11895
CONTINENTAL HEALTH AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2362097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
910 Sylvan Avenue
Englewood Cliffs, N.J. 07632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 567-4600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.02
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 shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
As of September 23, 1997 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $17,598,098.
As of September 23, 1997, 10,127,151 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of definitive proxy statement to be filed not later than October
29, 1997.
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TABLE OF CONTENTS
Part I
Item 1. Business................................................
Item 2. Properties..............................................
Item 3. Legal Proceedings.......................................
Item 4. Submission of Matters to a Vote of Security Holders.....
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Part II
Item 5. Market Information......................................
Item 6. Selected Consolidated Financial Data....................
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations.......
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................
Part III ...............................................................
Part IV
Item 14. Exhibits, Consolidated Financial Statements, Financial
Statement Schedules, and Reports on Form 8-K........
Signatures.......................................................Last Page
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PART I
Item 1. Business.
General
Continental Health Affiliates, Inc. ("CHA" and, together with its
subsidiaries, the "Company") provides a variety of non-hospital based health
care services to patients. These alternate-site health care services include
long term care and assisted living facilities, home infusion therapy (including
enteral and parenteral nutrition and intravenous therapies) and provision of
medical products and services, including infusion therapy, to patients in long
term care facilities. The Company's home infusion and medical products and
services businesses are conducted by Infu-Tech, Inc. ("Infu-Tech"), a 58% owned
subsidiary.
In November 1995, the Company changed its fiscal year to end on June 30
of each year from December 31. Therefore, unless otherwise noted, references to
a year are to the fiscal year ending June 30.
New Developments
In June 1997, the Company sold its nursing homes in West Palm Beach,
Florida and Atlantic City, New Jersey for $6.1 million and $2.5 million,
respectively. The Company realized net gains of $2.1 million from these sales.
Athough the two facilities had revenues of $8.1 million for the year ended June
30, 1997, they reported an aggregate net operating loss of $2.1 million.
In June 1997, the Company sold a 15% limited partnership interest in a
partnership which, in 1987, purchased a property in Teaneck, New Jersey from the
Company and constructed a 224-bed congregate care facility (i.e., a facility on
which medical and nursing services are available if needed, but are not provided
on a regular basis) on the property. The Company's partnership interest was sold
for $700,000.
In July/August 1997, the Company entered in commitments for the
construction and short-term permanent financing for assisted living projects
which it plans to develope at its Norwood, New Jersey site and property owned by
it in Pine Brook, New Jersey. (The Pine Brook property was the site of a nursing
home sold by the Company in 1996.)
In September 1997, the Company entered into an agreement to acquire a
75% interest in a company providing institutional pharmacy services.
Nursing Homes
As of July 1, 1997, the Company was operating or managing five nursing
homes with approximately 800 beds. Typically, the Company provides lodging,
meals and nursing assistance to residents of its nursing homes for a per diem
charge and provides limited additional treatment for additional charges.
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The following table provides information about the nursing homes the
Company was operating (as owner or as lessee) or managing as of July 1, 1997.
<TABLE>
<CAPTION>
Average Occupancy Percentage
Six Months Year Ended
Number Ended June 30,
Location of Beds 1994 June 30, 1995 1996 1997
-------- ------- ---- ------------- ---- ----
<S> <C> <C> <C> <C> <C>
Nursing Homes Being Operated:
Cedar Grove, NJ..................... 180 96% 96% 95% 91%
Cape May Courthouse, NJ............. 116 98% 97% 97% 96%
Philadelphia, PA.................... 135 93% 92% 95% 93%
West Orange, NJ..................... 131 78% 92% 94% 93%
Nursing Homes Being Managed:
Norwood, NJ (Heritage)
Skilled........................... 180 98% 98% 98% 94%
Residential Care.................. 66 100% 100% 100% 93%
</TABLE>
As of June 30, 1997, the Company owned the nursing homes in Philadelphia,
Cedar Grove, West Orange and the real property of the long term and residential
care facility located in Norwood, New Jersey (the "Heritage Facility"). The
Company leases the nursing home in Cape May Courthouse.
The Company leases the Heritage Facility to the owner of the facility, Senior
Care Foundation, Inc. ("SCF"), a not for profit corporation, for twenty-five
years at a rental of $2.4 million per year. The Company manages the Heritage
Facility and receives a management fee of 5% of the gross revenues of the
Heritage Facility (after the payment of rent to the Company). The operations of
SCF are included in the consolidated financial statements from October 31, 1995
which was when the Company purchased the real property of the Heritage facility.
The occupancy percentage for the West Palm Beach, Florida nursing home was
impacted by a moratorium on admissions imposed in December 1995 as a result of
state survey deficiencies. The state resurveyed the facility and the moratorium
was lifted (opening the facility to admissions) in May 1996. This facility was
sold in June 1997. The average occupancy percentage for the year was 57%.
Infusion Therapy and Other Medical Services
The Company through Infu-Tech, provides infusion therapy (i.e.,
administration of nutrients, antibiotics and other medications either
intravenously or through feeding tubes) and other medical products to patients
in their homes, in Infu-Tech's ambulatory suites and in nursing homes. The
Company was one of the early marketers of equipment and nutrients for infusion
therapy and was one of the first to market equipment and formulations for
intravenous infusion of nutrients and medication outside hospitals.
Infu-Tech is organized into two service units. The Intravenous Infusion
unit provides a broad range of home, ambulatory and subacute infusion therapy
services, including intravenous total parenteral nutrition therapy, antibiotic
therapy, enteral nutrition therapy, chemotherapy, chronic pain management
therapy, hydration therapy and a variety of other therapies. The Contract
Services unit provides medical products and services, including enteral
nutrition therapy, intravenous infusion therapy, urological products and wound
care products, to residents in long term care facilities.
Infu-Tech's sales and marketing efforts are primarily directed towards
Managed Care. It has over 58 agreements with Managed Care covering over 17
million members to provide infusion therapy and other home health services. The
agreements with Managed Care vary from preferred provider relationships to being
one but, not only the provider. Reimbursement is generally on a per diem basis.
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In June 1997, Infu-Tech announced it had established a Disease
Management Services Division, which will focus on developing comprehensive
preventive treatment programs for patients with chronic conditions, such as
asthma, diabetes and congestive heart failure.
Infu-Tech's continued marketing efforts directed at managed care
companies bring significant opportunity to drive new programs like Disease
Management through existing relationships.
In 1997, Infu-Tech renewed its non-exclusive distribution agreement with
Genzyme Corporation for Ceredase(R) enzyme and Cerezyme(TM), which are the only
products approved by the FDA as therapy for patients with Gaucher's disease.
Genzyme estimates that there are between 2,000 and 2,500 Gaucher patients in the
United States who require treatment with those drugs. Cost of the therapy
normally ranges from approximately $150,000 to $250,000 per year per patient.
Because of this high cost, Infu-Tech's percentage mark-up is relatively small.
The following table sets forth the percentages of Infu-Tech's revenues,
by service unit, from the various therapies, products and services.
<TABLE>
<CAPTION>
Six months ended Year ended Year ended
June 30, 1995 June 30, 1996 June 30, 1997
--------------------------------------------------------------------------
Intravenous Contract Total Intravenous Contract Total Intravenous Contract Total
Infusion Services Revenues Infusion Services Revenues Infusion Services Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Enteral Nutrition 4% 68% 24% 3% 72% 20% 3% 71% 20%
Antibiotic 32% - 22% 30% - 23% 27% - 20%
TPN 7% - 5% 7% - 5% 5% - 4%
Orthotics - 3% 1% - 1% - - - -
Immune Globulin 9% - 6% 8% - 6% 10% - 7%
Ceredase/Cerezyme 26% - 18% 27% - 20% 32% - 24%
Wound Care - 8% 2% - 2% 1% - 1% -
Other 22% 21% 22% 25% 25% 25% 23% 28% 25%
100% 100% 100% 100% 100% 100% 100% 100% 100%
=============================================================================
</TABLE>
Overview of the Home Health Care Industry
One of the major factors contributing to the rapid growth of home health
care has been the use of alternate site health care to contain the rising costs
of health care. Consumers of all types, including governmental bodies, managed
care organizations, insurance companies and private payors are recognizing the
savings that can be realized by offering care in the home as opposed to
institutional settings. In addition, an aging population and patients'
preferences for receiving health care in the comfort of the home, combine with
advances in medical technology making the delivery of sophisticated treatments
in the home a reality, are all contributing to the continued growth of the home
health care industry.
Managed care organizations are becoming important players in the home
health market and have exerted pricing pressure on the providers of home health
care services. Such pressure has negatively impacted the profit margins of home
health care producers. In addition, as the managed care organizations continue
to grow, they may show a preference to deal only with those home health care
service providers who can offer a comprehensive range of services throughout
such managed care organization's area of operations. In response, what once was
a very fragmented industry is undergoing a wave of consolidation.
With the development of additional oral medications to replace
medications that are administered intravenously, there has been a decrease in
the demand for home infusion therapies. Providers of oral pharmaceuticals are
servicing an increasing number of patients who previously required infusion
therapies.
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Intravenous Infusion Therapy
Intravenous infusion therapy principally involves the intravenous
administration of nutrients, antibiotics or other medications to patients in
their homes, in Infu-Tech ambulatory suites, or in Infu-Tech credentialed
subacute facilities, often as a continuation of treatment initiated in the
hospital. The national non-hospital infusion therapy market has grown to over $4
billion since its inception approximately 17 years ago. Infu-Tech believes the
primary factors contributing to the rapid growth of the non-hospital infusion
therapy market have been health care cost containment pressures, incentives by
third party payors to use home care, rapid growth of the elderly population and
increased acceptance of home infusion therapy by the medical community and
patients. Additionally, the number of therapies that can be administered safely
outside the hospital has increased significantly in recent years because of
technological innovations such as more sophisticated portable infusion control
devices, implantable injection ports, new vascular access devices and advances
in drug therapy. Consequently, more infections and diseases that would otherwise
have required patients to be hospitalized are now considered treatable without
hospitalization.
Before accepting a patient for infusion therapy, Infu-Tech consults with
the physician or clinician and hospital personnel in assessing the patient's
specific medical needs and suitability for home infusion therapy. This
assessment process includes an analysis of the patient's physical condition as
well as social factors such as the stability of the patient's home life and the
availability of family members or others who can assist in the administration of
the patient's infusion therapy. Once the patient is accepted for therapy,
Infu-Tech provides training and education to the patient and his family or
others relating to proper infusion techniques, care and use of equipment, care
of infusion sites, and other aspects of the patient's infusion therapy. Infusion
therapy equipment, consisting primarily of poles and pumps, is owned or leased
by the Infu-Tech and provided to patients along with other services.
Throughout the course of treatment, all prescribed drugs and solutions
are delivered directly to the patient's home or to an Infu-Tech credentialed
subacute care facility. In approximately 90% of the cases, Infu-Tech's own
pharmacies provide the prescribed drugs, solutions and supplies. Due to
geography, patients who cannot be adequately serviced through an Infu-Tech owned
pharmacy are covered by one of six satellite pharmacies. Infu-Tech maintains
contact with the patient and the patient's physician in order to monitor and,
when directed by the physician, refine the patient's plan of care. Infu-Tech's
nursing and pharmacy services are available on-call 24 hours a day for
consultation, home visits and special prescription needs.
A registered nurse clinical-coordinator follows each case and monitors
the therapy with the patient, the nurses assigned to the case and the patient's
physician. Billing information is coordinated at a central billing department
which bills the appropriate payor and tracks payments.
During 1994, Infu-Tech began also to provide infusion therapy services
in ambulatory infusion suites attached to its pharmacies, where patients receive
infusion therapy on an out-patient basis. In addition, Infu-Tech began arranging
with nursing homes and other subacute facilities to have patients admitted on a
short term basis to receive infusion and other subacute therapies.
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Contract Services
Since late 1990, the Contract Services unit has expanded the number of
products it offers to nursing homes and other health care institutions, and it
expects to offer additional products, embodying advances in health care
technology, in the future. On the other hand, changes in reimbursement
regulations or interpretations have led the Contract Services unit to reduce
sales of products in the past and may do so in the future.
Infu-Tech's contract services involve the distribution of products and
services to residents in long term care facilities. Products and services are
provided through arrangements with the long term care facilities for specific
residents' use. Generally, Infu-Tech bills a third party payor, principally
Medicare, on behalf of the individual resident. However, starting July 1, 1998,
suppliers will not be directly reimbursed by Medicare for providing services to
residents of skilled nursing facilities ("SNF's"). Rather, Infu-Tech will bill
the SNF's for services provided and the SNF's themselves will bill Medicare.
Until late 1990, a large majority of the products and services Infu-Tech
provided to residents of long term care facilities involved enteral nutrition
therapy. Beginning in late 1990, Infu-Tech began marketing other products to
residents of long term care facilities in circumstances in which these products
are eligible for reimbursement under Medicare and other programs. Because of
this shift, and a recent willingness of some long term care facilities to permit
residents to receive intravenous therapies in the facilities (which increases
the facilities' revenues), rather than transferring the residents to hospitals
for these treatments, the products and services Infu-Tech provides through its
contract services unit now include, in addition to enteral feeding, parenteral
feeding, medical/surgical products, wound care products, urological products and
other supplies.
As part of providing its products and services to residents in long term
care facilities, Infu-Tech handles the procedures for obtaining reimbursement
from Medicare and other third party payors for these products and services.
Infu-Tech's sales representatives call upon long term care facilities
within their respective geographical territories to review the medical status of
the facilities' residents in order to determine the needs of individuals for the
products and services provided by Infu-Tech. Since most of the residents
participate in the Medicare program, the representatives review insurance
coverage and the appropriateness of the products and services under Medicare
reimbursement regulations. The sales representatives are responsible for
processing the paperwork for billing by the central billing department.
Orders for products and services are processed through the customer
service department at Infu- Tech's corporate offices in Englewood Cliffs and
shipped from its Moonachie, New Jersey warehouse. Infu-Tech primarily uses its
own trucks for local (New York-New Jersey) deliveries and common carriers for
deliveries outside the local area.
Other Activities
A wholly owned subsidiary of the Company has a non-exclusive
distribution agreement with Eli Lilly Export S.A. to market, sell and distribute
Lilly's pharmaceuticals in Russia. During 1997 the Company had total sales of
$196 under its arrangement with Lilly.
Reimbursement For Services
The Company estimates that approximately 70% of the revenues of the five
nursing homes the Company operates were third-party reimbursements from Medicare
and Medicaid. Governmental reimbursement for nursing home care is at cost-based
per diem rates.
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Infu-Tech is reimbursed for its products and services by Medicare,
Medicaid, private payors (private insurance companies, self-insured employers,
health maintenance organizations, other managed care systems and patients) and
other third party sources. Prior to accepting a patient, Infu-Tech's
reimbursement specialists determine the availability and amount of third party
coverage and, thereafter, Infu-Tech processes all payment claims on behalf of
the patient.
Most of Infu-Tech's contract services revenues result from Medicare
reimbursement. Infu-Tech has more than thirteen years' experience in billing
Medicare. Medicare provides reimbursement for 80% of the amounts shown on fee
schedules it has developed. The remaining 20% co-insurance portion is not paid
by Medicare, although in most cases, Medicaid reimburses the remaining 20% for
"medically indigent" patients. In other cases, Infu-Tech bills other third party
payors or patients responsible for co-insurance reimbursement. Infu-Tech often
has difficulty collecting the 20% co-insurance portion of charges for
Medicare-eligible items, particularly when there is no third party reimbursement
and these sums must be collected directly from patients. Inability to collect
the 20% co-insurance portion of bills is the principal reason for Infu-Tech's
provision for uncollectible accounts.
Starting July 1, 1998 suppliers will not be directly reimbursed by
Medicare for providing services to residents in skilled nursing facilities (see
Government Regulation).
Infu-Tech also bills private payors (primarily private insurance
companies, self-insured employers, health maintenance organizations and managed
care systems), which generally pay for services and products based upon
contracted rates or "reasonable and customary" charges. Infu-Tech's billing
specialists work closely with these payors to maximize reimbursement in the
shortest possible time. Private payors have been increasingly concerned about
cost containment and often seek to negotiate lower rates directly with
providers, including Infu-Tech. While these efforts tend to reduce profit
margins, Infu-Tech has for several years been able to operate in this
environment.
The following table details the sources of payments to Infu-Tech during
the twelve months ended June 30, 1997:
<TABLE>
<CAPTION>
Home Contract Total
Infusion Services Revenues
-------- -------- --------
<S> <C> <C> <C>
Medicare............................ 4% 87% 25%
Private Pay......................... 93% 13% 73%
Medicaid............................ 3% - 2%
------- -------- -----
100% 100% 100%
======= ==== ====
</TABLE>
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Sales and Marketing
The Company's nursing homes have historically been marketed to doctors,
hospitals and social services agencies in the areas in which they are located,
and directly to patients' families. Recently, they have increasingly been
marketed to health maintenance organizations, preferred provider organizations
and managed care systems. Each nursing home has an admissions staff which
interviews with the family, makes financial arrangements and coordinates the
admission of the new resident.
Infu-Tech's principal sources of patient referrals are health
maintenance organizations, physicians, hospital discharge planners, other
hospital officials, nursing homes, insurance companies and other managed care
systems. Infu-Tech's products and services are marketed through its sales force
and clinicians. Infu-Tech's sales force is responsible for establishing and
maintaining referral sources. At June 30, 1997, the sales force included
approximately 13 full time sales employees and approximately 6 sales and service
representatives, who report to their respective regional managers. Sales
employees receive a base salary plus commissions based on revenues. Infu-Tech
conducts regular sales training programs, intended to enable its sales force to
generate more revenue from current and new sources of patient referrals and to
assist them in targeting and developing new revenue sources.
The "Infu-Tech" trademark is registered and is established in the areas
in which Infu-Tech does business.
Suppliers
The Company purchases supplies, drugs and other materials and leases
equipment from many suppliers. The Company has not experienced difficulty in
purchasing supplies or leasing equipment. The Company believes there are
alternative sources for virtually all the supplies and equipment it requires,
other than Ceredase(R) enzyme and Cerezyme(TM), which are only available from
one supplier, Genzyme Corporation.
Potential Liability and Insurance
Participants in the health care market are subject to lawsuits based
upon alleged negligence or similar legal theories, many of which involve large
claims and significant defense costs. The Company could be subject to such
suits. The Company maintains general liability insurance, including insurance
against professional and products liability, with coverage limits of $10
million. The Company's insurance policy provides coverage on an "occurrence"
basis and is subject to annual renewal. A successful claim against the Company
in excess of the applicable insurance coverage could have a material adverse
effect upon the Company's business and results of operations. Claims against the
Company, regardless of their merit or eventual outcome, also may have a material
adverse effect upon the Company's reputation. There can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. While the
Company has been able to obtain liability insurance in the past, such insurance
varies in cost, is difficult to obtain and may not be available in the future on
acceptable terms or at all.
Competition
The Company's long-term care and assisted living facilities compete with
other facilities in the areas in which they are located, as well as, to a
limited extent, hospitals and home health care providers. Competition is based
primarily on location and quality of the facilities and price.
The segments of the health care market in which Infu-Tech operates are
highly competitive. In each of its lines of business there are relatively few
barriers to entry, a limited number of national providers, as many of the large
national providers have recently merged, and numerous regional and local
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providers. The principal competitors for sales to patients in long term care
facilities are local providers of health care products and the operators of the
facilities themselves.
The competitive factors most important in Infu-Tech's lines of business
are quality of care and service, on-time delivery, reputation with referring
health care professionals, ease of doing business with the provider, ability to
develop and maintain the confidence of potential sources of patient referrals
and price of service. Some competitors in Infu-Tech's lines of business have
also attempted to enhance sales by entering into joint ventures or other
financial relationships with potential referral sources. Increasingly stringent,
and increasingly enforced, laws prohibiting remuneration between health care
providers has reduced these arrangements as a competitive factor. Infu-Tech
believes that it competes effectively in each of its service areas with respect
to all of the above factors. Some of Infu-Tech's current and potential
competitors have or may obtain significantly greater financial and marketing
resources than Infu-Tech. It is likely that Infu-Tech will encounter increased
competition in the future, which could limit Infu-Tech's ability to maintain or
increase its market share and could adversely affect Infu-Tech's operating
results. Other types of health care providers, including hospitals, physician
groups and home health agencies, have entered, and may continue to enter,
Infu-Tech's lines of business.
Government Regulation
Most states require that a certificate of need be obtained prior to
establishing or expanding, a nursing home or assisted living facility. This can
restrict the number of facility beds within a specified area. Some states also
require governmental approval prior to the acquisition of a facility by a new
owner. While the need for certificates of need and approval to acquire
facilities could affect the Company in specific instances, the Company does not
believe they would significantly impede any efforts the Company might make to
expand its overall long term care and assisted living activities. A few states,
most notably New York, make it very difficult for nursing homes to be owned by
corporations. This could prevent the Company from acquiring or building nursing
homes in those states.
A New Jersey statute requires that any nursing home in that state which
participates in the Medicaid program may not discriminate in admission policy
against Medicaid patients until the number of Medicaid patients is a specified
percentage (currently 45%) of the beds in the nursing home. Generally,
non-Medicaid patient reimbursement is at higher rates than Medicaid patient
reimbursement.
Health care is an industry subject to extensive regulation and frequent
regulatory change. Changes in the law or new interpretations of existing law can
have a dramatic effect on permissible activities, the relative cost associated
with doing business and the amount of reimbursement by government and third
party payors, such as Medicare and Medicaid. Charges under government programs
are also subject to audit. A reduction in coverage or payment rates by third
party payors, or significant audit adjustments, can have a material adverse
effect on the Company's business and results of operations.
The Federal government and each of the states in which Infu-Tech
currently operates regulate some aspects of Infu-Tech's business. In particular,
the operations of Infu-Tech's branch locations are subject to Federal and state
laws. Infu-Tech's operations also are subject to state laws governing
pharmacies, nursing services and certain types of home health agency activities.
Certain of Infu-Tech's employees are subject to state laws and regulations
governing the ethics and professional practice of people providing various
therapies, pharmacy and nursing. Certificates of need, permits or licenses may
be required for certain business activities and may be restricted or otherwise
difficult to obtain. Infu-Tech believes it and its employees have all
certificates of need, permits and licenses which are required for the business
currently being conducted by Infu-Tech. The failure to obtain, renew or maintain
any of the required regulatory approvals or licenses could adversely affect
Infu-Tech's business and could prevent the location involved from offering
products and services to patients.
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There are Federal laws which generally prohibit any remuneration in
return for the referral of Medicare or Medicaid patients, and prohibit the
referral of any Medicare or Medicaid patient by a health care practitioner to a
provider with which the practitioner has an ownership or financial interest. In
addition, the Federal government and several states in which Infu-Tech operates
have laws that prohibit financial arrangements, certain direct or indirect
payments or fee-splitting arrangements between health care providers. Infu-Tech
maintains an internal regulatory compliance review program and uses in house
counsel to monitor compliance with all such laws and regulations. Increased
attention has been paid recently to enforcement of these laws and regulations.
Possible sanctions for failure to comply with these laws and regulations include
exclusion from the government programs, loss of license and civil and criminal
penalties.
The Balanced Budget Act, passed into law in August 1997, will impact the billing
process for Infu-Tech's contract services division. Commencing July 1, 1998
suppliers will not be directly reimbursed by Medicare for providing services to
residents in skilled nursing facilities ("SNF's"). The Act provides that
Medicare Part B items like parenteral and enteral nutrition are to be provided
by the SNF's for residents whose SNF care is covered by Medicare, and further
provides that payment for Part B items supplied to SNF's residents is to be made
only to the SNF's. Infu-Tech, in turn, will have to contract with the SNF's to
provide, and be paid for, the services provided.
Executive Officers of the Company
The following is a list of the executive officers of the Company as of
June 30, 1997, together with a brief description of the business experience of
the last five years of the officers who are not directors. A brief description
of the business experience of officers who are directors is included in Item 10,
"Directors."
Name Office Age
---- ------ ---
Jack Rosen Chairman, President and Director 51
Joseph Rosen Vice President, Assistant Secretary and 46
Director
Israel Ingberman Secretary, Treasurer and Director 51
Benjamin Geizhals Vice President, Assistant Secretary and 48
General Counsel
S. Colin Neill Vice President, Chief Financial Officer 51
Benjamin Geizhals joined the Company in September 1987 as Vice President
and General Counsel. He has served as General Counsel of Infu-Tech since its
inception and as Vice President and General Counsel of Infu-Tech since 1994.
S. Colin Neill has been Vice President and Chief Financial Officer of
the Company and Infu-Tech since July 1996. Prior to that Mr. Neill was Acting
Vice President/Finance, Secretary, Treasurer and Chief Financial Officer of
Pharmos Corporation, a publicly traded biopharmaceutical company from March 1995
to July 1996. Prior to joining Pharmos, Mr. Neill worked as a financial
consultant. From October 1992 until December 1993, Mr. Neill was Vice President
- - Finance of BTR, Inc., a British publicly traded diversified manufacturing
company. From January 1991 to October 1992, he worked as a financial consultant.
From 1986 through January 1991, Mr. Neill served as Vice President - Financial
Services of BOC Group, Inc., a British publicly traded industrial gases and
health care company. He is a certified public accountant and worked at Arthur
Andersen & Co. for four years followed by eight years with Price Waterhouse.
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Employees
At June 30, 1997, the Company had approximately 126 full-time
management, marketing, technical-professional and clerical personnel, including
Infu-Tech's approximately 112 employees. The Company's five nursing homes were
staffed by approximately 131 full-time management, marketing,
technical-professional and clerical personnel, approximately 194 registered or
practical nurses and 458 other people, for a total of approximately 800 people,
all of whom were obtained through an employee leasing organization until March
31, 1997. The various nursing homes became the employer effective April 1, 1997.
All of the Company's nursing homes have collective bargaining agreements. The
Company believes its relations with its employees are generally satisfactory.
As of June 30, 1997, Infu-Tech had approximately 112 employees. Of these
employees, five were in executive capacities (in addition to executives of CHA
who rendered services to Infu-Tech), approximately 19 were in sales or service
capacities, approximately 46 were in clinical or pharmaceutical capacities and
the remainder were administrative or distribution personnel. Infu-Tech's
employees are not currently represented by a labor union or other labor
organization. Infu-Tech believes that its employee relations are good.
Item 2. Description of Properties.
As of June 30, 1997, the Company owned the nursing homes in
Philadelphia, Cedar Grove and West Orange and the real property of the long term
and residential care facility located in Norwood, New Jersey (The "Heritage
Facility"). (See Item 1, "Business -- Nursing Homes.") The Company leases the
nursing home in Cape May Courthouse.
The Company maintains corporate offices in Englewood Cliffs, New Jersey
and it leases five branch offices for Infu-Tech's branch operations. Offices
provide a home base for salespeople, clinicians and administrative and technical
personnel, as well as storage for excess equipment and supplies. In addition,
Infu-Tech maintains a central pharmacy and a warehouse in Moonachie, New Jersey
and pharmacies and ambulatory infusion suites in Memphis, Tennessee, Boston,
Massachusetts, Philadelphia, Pennsylvania and Fort Lauderdale, Florida. The
lease payments for the five branch offices, the central pharmacy, the Memphis,
Boston, Philadelphia and Fort Lauderdale pharmacies, the infusion suites and the
warehouse total $34,026 per month, payable to unrelated parties. The Company
pays rent of $27,720 per month for corporate office space. In communities which
cannot be serviced from an Infu-Tech office, staffing and administration is
handled by a representative residing in the area. The Company believes its
facilities are adequate for its current needs.
Item 3. Legal Proceedings.
The previously reported action in the United States District Court for
the District Court for the District of New Jersey entitled Rubin v. Continental
Health Affiliates was settled at an immaterial cost to the Company.
Infu-Tech has fully paid and satisfied its previously announced
settlement with the Office of Inspector General of the U.S. Department of Health
and Human Services.
The Company and its subsidiaries are subject to legal proceedings and
claims which arise in the ordinary course of its business. The Company does not
believe any litigation to which it is a party is likely to have a material
adverse effect upon its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
12
<PAGE>
No matters were submitted to a vote of security holders during the year
ended June 30, 1997, except a proposal for the adoption of the 1996 Key
Employees and Key Personnel Stock Option Plan which proposal was approved at the
shareholder's meeting on January 15, 1997.
13
<PAGE>
PART II
Item 5. Market for the Registrant's Common
Stock and Related Security Holder Matters.
On June 11, 1997 the Company's shares were listed on the Nasdaq Small
Cap Market. Prior to this, the Company's common stock had traded in the over -
the - counter market and was included in Nasdaq's OTC Bulletin Board Service.
According to the National Quotation Bureau, Inc. the high bid and low
bid prices of the common stock during each calendar quarter during 1995, 1996
and June 30, 1997 were as follow:
High Low
Bid Bid
1995:
First Quarter 1 3/8 1/2
Second Quarter 1 1/4 1/2
Third Quarter 1 7/16 1/2
Fourth Quarter 1 1/2 1 1/16
1996:
First Quarter 1 9/16 1 1/16
Second Quarter 3 1/16 1
Third Quarter 2 1/2 1 3/16
Fourth Quarter 3 1/8 1 5/8
1997
First Quarter 3 13/16 2 1/2
Second Quarter 3 1/16 2 1/2
The Company has not declared any cash dividends on its Common Stock
since the Common Stock was initially sold to the public in 1983, and the Company
has no current plans to declare any dividends on its Common Stock.
Dividends on the Company's 5% Exchangeable Preferred Stock are
cumulative and are payable semi-annually on January 27 and July 27 at the rate
of $5 per share per year, when and as declared by the Company's Board of
Directors. The dividends on the 13,884 outstanding shares of 5% Exchangeable
Preferred Stock total less than $70,000 per year. Under Delaware law, the
Company is only permitted to pay dividends out of accumulated surplus or the
current or prior year's net profits. At June 30, 1997, the Company had a surplus
of $5,624 and during the twelve months ended June 30, 1997, it had a net income
of $1,313.
At September 23, 1997 there were 370 holders of record of the Company's
Common Stock.
14
<PAGE>
Item 6. Selected Financial Data.
The following table sets forth selected financial data of the Company
and should be read in conjunction with the audited consolidated financial
statements for the years ended June 30, 1997 and June 30, 1996, the six months
ended June 30, 1995 and for the year ended December 31, 1994, and the related
notes included elsewhere in this Report:
<TABLE>
<CAPTION>
Six Months Year Ended
Year ended Year Ended Ended December 31,
INCOME STATEMENT DATA June 30, 1997 June 30, 1996 June 30, 1995 1994 1993
------------ ------------ ------------- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues............................$ 70,694 $ 69,880 $28,724 $54,378 $61,270
-------- -------- ------- ------- -------
Income (loss) from operations....... 3,007 4,116 (924) (917) 1,647
Interest and dividend income........ 104 221 183 98 184
Interest and other financing costs.. (6,343) (4,044) (632) (1,481) (3,082)
Other income, net................... 541 550 458 877 1,268
Minority interest................... (395) (494) 353 375 (194)
-------- -------- ------- ------- --------
Income (loss) before income taxes... (3,086) 349 (562) (1,048) (177)
Provision (benefit) for income taxes 662 270 -- (341) (385)
-------- -------- ----------------------- -------
Income (loss) before extraordinary
items (3,748) 79 (562) (707) 208
Extraordinary items (a)............. 5,191 777 -- 1,058 548
Cumulative effect of accounting change -- -- -- -- 973
------ -------- ------- ------- -------
Net income (loss)................... 1,443 856 (562) 351 1,729
Preferred dividends................. (130) (70) (35) (69) --
-------- --------- -------- -------- -----
Net income (loss) available to common
shareholders..................$ 1,313 $ 786 $ (597) $ 282 $ 1,729
======== ======== ========== ======= ========
Earnings (loss) per share:
Continuing operations.............$ (.38) $ 00 $ (.08) $ (.09) $ .04
Extraordinary items............... .51 .09 -- .13 .10
Cumulative effect of
accounting change.............. -- -- -- -- .19
-------- -------- ------- ------- -------
Net income (loss) available to common
shareholders...................$ .13 $ .09 $ (.08) $ .04 $ .33
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of December 31,
BALANCE SHEET DATA June 30, 1997June 30, 1996 June 30, 1995 1994 1993
-------------------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital (deficit).........$ 512 $ 45 $(6,060) $(4,392) $(13,586)
Total assets...................... 71,350 75,572 29,675 30,485 46,194
Total liabilities and deferred income 61,313 67,847 28,119 27,980 43,755
Minority interest................. 2,424 2,029 1,524 1,877 2,326
Mandatorily redeemable preferred stock 1,989 3,500 -- -- --
Stockholders' equity ............. 5,624 2,196 32 628 113
(a) In 1997 includes net gains on sale of land, two nursing homes and an
exchange of the Company's common stock at a lessor amount than the recorded
liability. All other prior years represent net gains on extinguishment of
Company debt (net of income taxes). 1996 also includes gain on disposal of
assets of a long-term care facility in Pine Brook, N.J. and extinguishment
of debt.
</TABLE>
15
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Results of Operations
Twelve Months Ended June 30, 1997 Compared with Twelve Months Ended June 30,
1996
Total revenues of $70,694,000 were $814,000 or 1% higher in the 1997 period
compared to the same period of the prior year. This is due to an improved
patient mix yielding higher reimbursement, the inclusion of the Heritage
Facility, for twelve months compared to eight months in the prior period while
being partially offset by lower occupancy at the West Palm Beach, Cedar Grove
and the Heritage facilities and the exclusion of the Hilltop facility (sold in
May 1996) for the current twelve months.
Infusion therapy and other medical services revenues increased by $1,221,000 or
5%, from $25,440,000 in 1996 to $26,661,000 in 1997, primarily due to a
$913,000, or 4% increase in Infu-Tech's home infusion division revenues. This
increase is primarily attributed to a 3% increased in the number of patients
serviced. These patients experienced shorter terms of therapy as well as
discounted pricing negotiated with managed care companies.
Personnel costs increased by $2,329,000 for the current twelve months. Primarily
attributed to the inclusion of the Heritage Facility for twelve months compared
to eight months in the prior period, normal cost of living increases, use of
Company personnel to perform some services previously performed by outside
consultants, higher Infu-Tech nursing costs incurred to support the 3% increase
in home infusion patients serviced, increased Infu-Tech pharmacy payroll, as
well as an increasing geographical coverage through Infu-Tech sales force
expansion. These costs were offset by the re-evaluation of certain accruals
aggregating $272,000 as well as the exclusion of Hilltop for the current twelve
months.
Costs of medical and nutritional products sold to patients and other customers
increased by $1,223,000 or 10%, from $12,001,000 in 1996 to $13,224,000 in 1997.
As a percentage of infusion therapy and other medical services revenues, medical
and nutritional product costs increased from 47% in 1996 to 50% in 1997. The
increase in the nutritional product costs as a percentage of sales is partially
attributable to increased pricing pressures from certain vendors.
Health care and lodging expenses, which are incurred in connection with nursing
home services decreased by $960,000 or 9%. A review of old accounts payable and
outstanding checks resulted in the company writing back to income an aggregate
of $565,000 of which $417,000 was reflected in the fourth quarter. The prior
year included four months of rent expense incurred prior to the October 1995
Nomura refinancing. The rent expenses have been replaced by interest and
depreciation charges. The Hilltop facility was sold in May 1996 and thus no
health care and lodging expenses have been incurred in fiscal 1997. During the
year, the Company settled litigation with a vendor which enabled $460,000 to be
released from payables into income. The Heritage facility is included for twelve
months compared to eight months in the prior year.
Selling, general and administrative costs decreased by $175,000, or 3%, A review
of old accounts payables and outstanding checks resulted in the Company writing
back to income an aggregate of $415,000. This decrease was offset by increases
of $709,000 attributable to Infu-Tech. These expenses are largely attributable
to investment banking retainer fees in connection with acquisition work,
engagement of an investor relations firm, costs connected with the development
of a disease state management program and distribution cost increases. In
addition, the opening of a Florida pharmacy and costs associated with setting up
the Humana Health Plans capitation contract added to the increase in selling,
general and administrative expenses.
16
<PAGE>
Beginning in the quarter ending March 31, 1997, Infu-Tech reviewed its allowance
for uncollectible accounts in light of its 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. As a result of this review, a total of $1,366,000
before taxes was released from the reserve for uncollectible accounts during the
year, resulting in a credit to the provision for the year of $196,000 compared
to a charge of $1,269,000 in the prior year. Based on this analysis Infu-Tech
expects a lower provision rate to be charged against sales going forward. The
evaluation of Infu-Tech's allowance for uncollectible accounts is the primary
reason for the reduction in the Company's provision from $1,210,000 in fiscal
year 1996 to $447,000 in fiscal year 1997.
Due to an October 31, 1995 refinancing for the acquisition of four facilities,
depreciation and amortization expenses increased by $269,000 and interest and
other financing costs increased by $2,299,000.
Other income, net of $541,000 in 1997 primarily consisted of $308,000 of income
resulting from the re-evaluation of accruals, an unrealized foreign currency
translation gain of $161,000 and $72,000 of deferred income. Other income of
$550,000 in 1996 consisted of deferred income of $543,000, an unrealized foreign
translation gain of $130,000, which were offset by miscellaneous expense.
Minority interest in earnings of subsidiary of $395,000 in 1997 and $494,000 in
1996 represents the portion of the net income of Infu-Tech allocable to minority
stockholders.
The provision for income taxes of $662,000 in 1997 reflects a full tax charge
for Infu-Tech, a 58% owned subsidiary which files its own federal tax return.
Fiscal year 1997 includes extraordinary gains of $5,191,000 as follows:
In December 1996 the Company sold 8 acres of land which secured a five year $1.5
million loan and utilized the proceeds to pay-down that borrowing recording a
gain of $875,000 million. In March 1997, the Company agreed to convert certain
liabilities into Common Stock of the Company. The transaction resulted in an
increase to shareholders equity of $2,542,000 of which $1,192,000 is reflected
as an extraordinary gain in the results of operations. In June 1997, the Company
sold Oceanside Convalescent Center, Atlantic City, N.J. as well as King David
Center in West Palm Beach, FL. The sale of these facilities yielded $2,124,000
of an extraordinary gain. In addition, the Company sold a 15% interest in a
limited partnership which in 1987, purchased a property in Teaneck, New Jersey
from the Company and constructed a 224-bed congregate care facility for
$700,000. A forfeited deposit by a potential nursing home buyer resulted in a
gain of $300,000. The extraordinary gain of $777,000 in fiscal year 1996
resulted primarily from the sale of assets relating to the Hilltop facility.
The preferred stock dividend does not include the 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 $1,313,000 or 13
cents per share compared to a net income available to common shareholders in
1996 of $786,000 or 9 cents per share.
Twelve Months Ended June 30, 1996 Compared with (Unaudited) Twelve Months Ended
June 30, 1995
Total revenues were $13,836,000, or 25% higher for fiscal year 1996
compared to fiscal year 1995 in part because of revenues of $7,444,000
pertaining to the Heritage Facility (which was acquired on October 31, 1995) for
the eight month period from November 1, 1995 to June 30, 1996. Revenues were
reduced by $1,103,000, offset by a reduction of expenses of approximately
$517,000, in the third and fourth quarters attributable to suspension of
admissions at one of the Company's nursing homes from December 1995 to May 1996.
17
<PAGE>
Nursing home services revenues increased by $8,075,000, or 22%.
Excluding revenues pertaining to the Heritage Facility, nursing home services
revenues increased by $631,000 or 2%.
Infusion therapy and other medical services revenues increased by
$5,761,000, or 29%, from $19,679,000 in 1995 to $25,440,000 in 1996, primarily
due to a $5,482,000, or 42%, increase in home infusion division revenues which
was caused by a 38% increase in the number of patients serviced with improved
pricing.
Personnel costs increased by $4,257,000, or 15%. Excluding the Heritage
Facility, personnel costs increased by $3,293,000, or 11%, primarily attributed
to normal cost of living increases, use of Company personnel to perform some
services previously performed by outside consultants and higher state mandated
respiratory therapy costs.
Costs of medical and nutritional products sold to patients and other
customers increased by $2,857,000, or 31%, from $9,144,000 in 1995 to
$12,001,000 in 1996. As a percentage of infusion therapy and other medical
services revenues, medical and nutritional product costs was 46% in 1995 and 47%
in 1996.
Health care and lodging expenses, which are incurred in connection with
nursing home services, remained constant as a result of the acquisition of
nursing homes which were previously leased, rent expense declined but was offset
by the inclusion of expenses of the Heritage facility, offset by expenses of the
Heritage facility.
Selling, general and administrative costs increased by $647,000, or 10%.
Excluding the Heritage Facility, selling, general and administrative costs
increased by $317,000, or 5%, primarily attributed to increases in distribution
costs incurred to support the 38% increase in home infusion patients serviced
and increased legal expenses.
The provision for uncollectible accounts was 2% of revenues in 1996 and
3% of revenues in 1995.
As a result of the acquisition of four facilities in the October 31,
1995 refinancing, depreciation and amortization expenses increased by $957,000
and interest and other financing costs increased by $2,851,000.
Other income of $550,000 in 1996 consisted of amortization of deferred
income of $543,000, an unrealized foreign currency translation gain of $130,000,
which were offset by miscellaneous expense. Other income of $995,000 in 1995
consisted of amortization of deferred income of $866,000, $188,000 of income
resulting from an adjustment to accruals related to the deconsolidation of the
Heritage facility, offset by a foreign currency translation loss of $402,000.
Minority interest in profit of subsidiary of $494,000 in 1996 and
minority interest in loss of subsidiary of $538,000 in 1995 represents the
portion of the net income or loss of Infu-Tech allocable to minority
stockholders.
The provision for income taxes in 1996 reflects use of a portion of the
Company's net operating loss carryforwards.
In May 1996, the Company closed one of its nursing homes and sold its
assets (excluding land, building and certain current assets). The extraordinary
gain recorded was $693,000.
18
<PAGE>
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 available to common shareholders in 1996 was $786,000 or
9 cents per share compared to a net loss applicable to common shareholders in
1995 of $1,027,000 or 13 cents per share. The net income available to common
shareholders in 1996 was due to extraordinary gains, principally in gain on
closing a nursing home and sale of certain of its assets.
Six Months Ended June 30, 1995 Compared with Unaudited Six Months Ended June 30,
1994
Total revenues during the first six months of 1995 increased by
$1,666,000, or 6%, compared with the same period of the prior year, even though
revenues of the Heritage Facility were included through March 16, 1994, but 1995
revenues include only fees for managing the Heritage Facility. Excluding
revenues pertaining to the Heritage Facility in both years, total revenues
increased by $3,392,000, or 14%.
Nursing home services revenues decreased by $1,817,000, or 9%. Excluding
revenues pertaining to the Heritage Facility in both years, nursing home
services revenues decreased by $91,000, or 1%. Excluding the Heritage Facility
in both years, total patient days decreased 1%, primarily due to a 40 bed
reduction in the number of available beds at one of the Company's nursing homes,
partially offset by a 3% increase in patient days at the other facilities. The
occupancy percentage increased from 91.4% in 1994 to 94.1% in 1995.
Infusion therapy and other medical services revenues increased by
$3,483,000, or 50%, primarily due to a $3,800,000, or 110%, increase in home
infusion division revenues. This increase is partially attributed to a 75%
increase in the number of patients serviced. Most of the additional home
infusion patients were obtained through marketing efforts directed at managed
care companies. These patients are normally serviced under agreements with
significant price discounts or under other arrangements which substantially
reduce prices. The increase in home infusion revenues was also affected by the
Company's beginning to provide in early 1994 Ceredase(R) enzyme and Cerezyme(TM)
infusion therapy ("Ceredase(R)") to patients with Gaucher's disease. Sales of
Ceredase(R) in the 1995 period were $1,945,000, compared to $175,000 in the same
period of 1994. Ceredase(R) is a very high priced drug therapy (approximately
$20,000 per month per patient), but due to its high product cost per revenue
dollar, it has a very low gross profit margin percentage.
Personnel costs increased by $9,000. Excluding the Heritage Facility,
personnel costs increased by $1,053,000, or 8%, primarily attributed to normal
cost of living increases, higher Infu-Tech nursing costs incurred to support the
75% increase in home infusion patients serviced and increased Infu-Tech pharmacy
payroll costs due to new pharmacy operations and the higher number of home
infusion patients serviced.
Costs of medical and nutritional products sold to patients and other
customers increased by $2,430,000, or 85%. As a percentage of infusion therapy
and other medical services revenues, medical and nutritional product costs
increased from 41% in 1994 to 51% in 1995. The increase is primarily attributed
to the lower home infusion pricing and the Ceredase(R) sales discussed above.
Health care and lodging expenses, which are incurred in connection with
nursing home services, decreased by $412,000, or 7%. Excluding the Heritage
Facility, health care and lodging expenses increased by $59,000, or 1%.
Selling, general and administrative costs increased by $280,000, or 10%.
Excluding the Heritage Facility, selling, general and administrative costs
increased by $330,000, or 12%, primarily attributed to higher Infu-Tech
distribution costs incurred to support the 75% increase in home infusion
patients serviced, start-up costs associated with new businesses and higher
rent, travel and entertainment costs.
19
<PAGE>
The provision for uncollectible accounts was 3% of revenues in both the
1995 and the 1994 periods.
Depreciation and amortization expenses decreased by $135,000. Excluding
the Heritage Facility, depreciation and amortization expenses decreased by
$17,000, because certain leasehold improvements became fully amortized during
the second quarter of 1994.
Interest and dividend income increased by $131,000, primarily due to
$148,000 of interest income earned on a $7.4 million mortgage note receivable in
1995. Interest on this note receivable was not recorded as income in 1994
because agreements of the obligor prevented it from paying that interest.
Interest and other financing costs decreased by $288,000, primarily due
to lower debt balances.
Other income of $458,000 in 1995 and $340,000 in 1994 primarily
consisted of amortization of deferred income of $579,000 in both 1995 and 1994
and $188,000 of income in 1995 resulting from an adjustment to accruals related
to the deconsolidation of the Heritage Facility, partially offset by unrealized
foreign currency translation losses of $309,000 in 1995 and $225,000 in 1994.
Minority interest in loss of subsidiary of $353,000 in 1995 and $190,000
in 1994 represents the portion of the net loss of Infu-Tech allocable to
minority stockholders.
Due to uncertainty about the ability of Infu-Tech, a 59% owned
subsidiary which files its own tax returns, to recognize the tax benefit of its
1995 operating loss, Infu-Tech did not record a tax benefit of that loss.
Primarily because of this, the Company did not record any tax benefit for the
1995 period. Management of the Company anticipates that Infu-Tech will in the
future have sufficient taxable income to recover the benefit of prior period
losses which were recorded as deferred tax assets at June 30, 1995. With regard
to the six months ended June 30, 1994, the Company recorded a benefit for income
taxes of $487,000, consisting of $171,000 absorbed by taxes on extraordinary
gains and $316,000 resulting from losses of Infu-Tech.
The 1995 loss was $562,000 ($.08 per share) compared to the same period
prior year loss before extraordinary gains of $165,000 ($.02 per share). The
extraordinary gains of $1,058,000 in the same period of 1994 represented the
amounts by which bank loans were satisfied for less than their principal
amounts, net of transaction costs and income taxes.
The preferred stock dividend related to the 5% exchangeable preferred
stock.
The net loss applicable to common shareholders in the six months ended
June 30, 1995 was $597,000 ($.08 per share) compared to net income applicable to
common shareholders in the first six months of 1994 of $858,000 ($.11 per
share).
Liquidity and Capital Resources
At June 30, 1997, the Company had stockholders' equity of $5,624,000 and
total liabilities of $63,302,000. At June 30, 1997 debt amounted to $48,804,000,
the majority of which arose from the acquisition of four facilities under the
Nomura refinancing in October of 1995. Other debt included SFr 662,215
(approximately $453,000) principal amount of 6% Swiss franc denominated bonds
which remain unpaid although they matured on June 27, 1995 (the "Bonds"); SFr
619,500 (approximately $424,000) 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.
20
<PAGE>
On October 4, 1996 an Exchange Offer was 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.
As of June 30, 1997 $440,000 face amount had been converted into common shares
of the Company, leaving $34,000 face amount of the Series A Convertible
Preferred Stock outstanding.
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 allowed the Company to
purchase 4 nursing homes (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 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. In September 1996 the Company converted an
additional $904,467 of trade payables into one to three year notes.
In December 1996, The Company sold the 8 acres of land which secured a
five year $1.5 million loan and utilized the proceeds to pay-down that
borrowing, leaving a balance of $454,000. The company has the right to prepay
that loan in full by December 31, 1997 and take a $150,000 credit, which it
intends to do. The balance remaining on the loan at June 30, 1997 is $388,000
which is secured by a pledge of Infu- Tech stock to cover 200% of the balance.
In June 1997 the Company sold one of the nursing homes which had secured
the October 31, 1995 borrowing and had issued preferred stock as additional
collateral. The proceeds of the sale were used, in part, to pay down the 15 year
borrowing and redeem the preferred stock. The balance of the 15 year borrowing
is $36,907,000 and the balance of the preferred stock outstanding is $1,989,000
at June 30, 1997.
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.
The Company's cash and cash equivalents balance increased from
$2,900,000 at June 30, 1996 to $3,796,000 at June 30, 1997. Included in the June
30, 1997 balance is $512,000 held by Infu-Tech. In connection with the initial
public offering of Infu-Tech common stock, the Company entered into a management
and non-competition agreement with Infu-Tech, extended to July 2000, which
prohibits Infu- Tech from lending money to (or borrowing money from) the
remainder of the Company.
Operating activities provided $2,298,000 of cash primarily due to an
increase in net accounts receivable of $3,517,000 offset by an increase in
payables and other current liabilities of $3,701,000 and net income of
$1,443,000. Of the $3,517,000 increase in accounts receivable, $1,102,000 is
attributable to Infu- Tech.
21
<PAGE>
At June 30, 1997, the balance in net accounts receivable for Infu-Tech was
31% higher than the balance at June 30, 1996. Net third party accounts
receivable increased by $1,444,000 during the year, mostly due to a reduction of
the allowance account. Infu-Tech's net accounts receivable has increased from 84
days sales at June 30, 1996 to 102 days sales at June 30, 1997 largely because
of the reduction in the allowance for uncollectible accounts. The DSO is
calculated on net accounts receivable. While Medicare payments continue to be
slow due to changes in reimbursement policies, and while managed care companies
have experienced delays in processing payments due to higher volume of claims
and/or systems conversions, Infu-Tech's collection rates have been strong. The
Company (excluding Infu-Tech) provided $2,150,000 of cash in operating
activities.
The Company has no arrangements under which it can make borrowings. At
June 30, 1997, the Company had a working capital of $512,000. Excluding
Infu-Tech, which had working capital of $5 million, the Company had a working
capital deficit of $4,532,000. Further, at June 30, 1997, Infu-Tech's cash and
cash equivalents of $512,000 were $179,000 less than the balance of $691,000 at
June 30, 1996 and its accounts payable of $4,288,000 were $1,509,000 higher than
the $2,779,000 at June 30, 1996.
During the twelve months ended June 30, 1997, the Company repaid
$7,406,000 of debt, $1,511,000 of mandatorily redeemable preferred stock and
paid preferred dividends of $83,000.
At June 30, 1997, the Company has approximately $5.7 million of debt due
in in the upcoming year including $2.2 million of mortgage debt which it intends
to refinance in fiscal 1998. In December 1996, the Company began to make
mandatory principal redemption payments of its subsidiaries' Preferred Stock of
$73,000 per month.
While the Company continues to experience tight cash flow constraints,
it is focused on generating sufficient funds through operating cash flow or the
realization of assets into cash to meet ongoing obligations.
The Company has not material capital commitments other than the development
of two assited living projects for which an $18.4 million financing commitment
has been otained.
Recently Issued Accounting Standards
In July 1996, the Emerging issues Task Force of the financial accounting
Standards Board reached a consensus on the Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred. The Company is assessing the extent of the necessary
modifications to its computer software.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("EPS"),
which is effective as of December 31, 1997. This standard changes the way
companies compute EPS to require all companies to show "basic" and "dilutive"
EPS and is to be retroactively applied, including each 1997 interim quarter. The
statement will not have a material effect on the calculation of EPS.
Item 8. Finncial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required by
this item appear beginning at page F-1.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
22
<PAGE>
PART III
Part III Items 10 through 13 to be filed by October 29, 1997 as part of
definitive proxy statement.
23
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements
Schedule, and Reports on Form 8-K
(a) Documents filed as part of this Report.
1. Financial Statements
Listed on Index to Consolidated Financial Statements and Financial
Statement Schedule.
2. Financial Statement Schedule
Listed on Index to Consolidated Financial Statements and Financial
Statement Schedule.
3. The following exhibits are filed with this Report or incorporated by
reference:
3(a) Certificate of Incorporation, as amended. (1)(6)
3(b) By-Laws, as amended. (1)
4(a) Specimen of Common Stock Certificate. (1)
4(b) Public Bond Issue Agreement dated as of May 31, 1985 with Banque
Gutzwiller, Kurz, Bungener S.A. as representative of a consortium of Swiss
financial institutions. (2)
4(c) Indenture dated as of September 4, 1986 relating to 14-1/8%
Subordinated Debentures due 1996. (3)
4(d) Supplemental Indenture No. 1 dated as of September 27, 1991. (10)
10(a) Agreement dated July 20, 1987 among Continental Teaneck Realty, Inc.,
Forest City Residential Development, Inc. and the Company. (4)
10(b) Certificate and Articles of Limited Partnership of CR Teaneck Limited
Partnership . (4)
10(c) Lease dated November 28, 1988 between Midlantic National bank,
Trustee, and Jayber, Inc. (5)
10(d) Lease dated November 28, 1988 between Midlantic National Bank,
Trustee, and Jayber, Inc. (5)
10(e) Lease dated December 28, 1998 between Midlantic National Bank & Trust
Company/Florida, Trustee, and P.V.M. Associates, Inc. (5)
10(f) 1989 Key Employees and Key Personnel Stock Option Plan. (6)
24
<PAGE>
10(g) Indenture dated September 1, 1993 between the Company and American
Stock Transfer & Trust Company. (7)
10(h) Debenture Purchase Agreement dated September 7, 1993 between the
Company and USLIFE Income Fund, Inc. (7)
10(i) Debenture Purchase Agreement dated September 7, 1993 between the
Company and The United States Life Insurance Company in the City of New York.
(7)
10(j) Option Agreement dated October 13, 1993 between the Company and Carl
D. Glickman. (7)
10(k) Bond Purchase Agreement dated October 27, 1993 among the Company,
Andrew J. McLaughlin, jr. and Gerald T. McLaughlin. (7)
10(l) Debenture Purchase Agreement dated October 27, 1993 among the
Company, Andrew J. McLaughlin, Jr. and Gerald T. McLaughlin. (7)
10(m) Restatement Modification and Extension of Loan Agreement and Note
dated as of July 13, 1993 between Barclays Bank, N.A. and the Company. (7)
10(n) Mutual Release dated March 16, 1994 between Barclays Bank, N.A., the
Company, Senior Care Foundation and the Company's Subsidiaries. (8)
10(o) Unconditional and Continuing Guaranty dated as of March 16, 1994 from
the Company and Continental Norwood, Inc. to Health Care REIT, Inc. (8)
10(p) Mortgage Note dated March 16, 1994 from Senior Care Foundation to
Continental Norwood Holdings, Inc. (8)
10(q) Mortgage dated march 16, 1994 from Senior Care of Continental Norwood
Holdings, Inc. (8)
10(r) Intercreditor Subordination agreement dated as of March 16,1 994
between Health Care REIT, Inc., Company, Continental Norwood, Inc., and
Continental Norwood Holdings, Inc. (8)
10(s) Management Agreement dated as of January 1, 1994 between Senior Care
Foundation and Continental Norwood, Inc. (8)
10(t) Distribution Agreement between Infu-Tech, Inc. and Genzyme
Corporation dated November 11, 1994.
10(u) Key Employees and Key Personnel Stock Option Plan.
11 Calculation of Earnings Per Share.
13 1994 Annual Report to Stockholders - to be furnished by amendment - that
report, except for any portions which are expressly incorporated by reference in
this filing, is not to be deemed "filed" as part of this filing.
21 List of Subsidiaries
25
<PAGE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1994.
None
(c) The exhibits to this Report are listed in item 14(a)3.
(d) The financial statement schedule required by Regulation S-X which is
excluded from the annual Report to Stockholders by Rule 14a-3(b)(1) is listed in
Item 14(a)(2).
FOOTNOTES
(1) Incorporated by reference to Registration Statement No. 2-81823.
(2) Incorporated by reference to Registration Statement No. 33-611
(3) Incorporated by reference to Registration Statement No. 33-6341
(4) Incorporated by reference to Report on Form 10-K for the year ended
December 31, 1987.
(5) Incorporated by reference to Report on Form 10-K for the year ended
December 31, 1988.
(6) Incorporated by reference to definitive proxy statement dated July 13,
1989.
(7) Incorporated by reference to Registration Statements Nos. 33-74474 and
33-7476.
(8) Incorporated by reference to Report on Form 10-K for the year ended
December 31, 1993.
26
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995 and December 31, 1994
(With Independent Auditor's Report Thereon)
27
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Index to Consolidated Financial Statements and
Financial Statement Schedule
1. Consolidated Financial Statements:
Independent Auditors' Report.......................................
Balance Sheets
June 30, 1997 and 1996.........................................
Statements of Operations:
Years Ended June 30, 1997, 1996 and Six Month Period Ended
June 30, 1995 and Year Ended December 31, 1994...............
Years Ended June 30, 1997, 1996 and Unaudited 1995 ............
Statements of Stockholders' Equity:
Years Ended June 30, 1997, 1996 and Six Month Period Ended
June 30, 1995 and Year Ended December 31, 1994...............
Statements of Cash Flows:
Years Ended June 30, 1997, 1996 and Six Months Ended
June 30, 1995 and Year Ended December 31, 1994...............
Notes to Consolidated Financial Statements.........................
2. Financial Statement Schedule:
Valuation and Qualifying Accounts..................................
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or notes thereto.
28
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Continental Health Affiliates, Inc.
We have audited the consolidated financial statements of Continental Health
Affiliates, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits 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 a
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 audits provide 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 Continental Health
Affiliates, Inc. and subsidiaries as of June 30, 1997 and 1996, and results of
their operations and their cash flows for the years ended June 30, 1997 and
1996, the six-month period ended June 30, 1995 and the year ended December 31,
1994 in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
September 26, 1997
New York, New York
29
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
June 30,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents..............................$ 3,796 $ 2,900
Patients' funds........................................ 188 184
Accounts receivable, net of allowances for uncollectible
accounts of $4,252 and $4,193....................... 13,346 10,177
Inventories............................................ 1,861 1,996
Deferred income taxes.................................. 702 822
Prepaid expenses and other current assets.............. 803 1,151
----------- -----------
Total current assets............................... 20,696 17,230
Property and equipment, at cost, net of accumulated
depreciation of $4,916 and $4,363...................... 46,991 54,453
Goodwill, net of accumulated amortization .................. 139 --
Deferred income taxes....................................... -- 52
Other assets................................................ 3,524 3,837
----------- -----------
Total assets.......................................$ 71,350 $ 75,572
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings..................................$ 105 $ 128
Current portion of long-term debt...................... 5,686 3,355
Income taxes payable................................... 437 --
Accounts payable....................................... 9,696 7,913
Other current liabilities.............................. 4,260 5,789
----------- -----------
Total current liabilities.......................... 20,184 17,185
Long-term debt, net of current portion...................... 41,129 50,574
Deferred income............................................. -- 72
Other liabilities........................................... -- 16
Mandatorily redeemable preferred stock (includes $1,166
current portion)....................................... 1,989 3,500
----------- -----------
Total liabilities.................................. 63,302 71,347
Minority interest in subsidiary............................. 2,424 2,029
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.02 par value; $100 liquidation preference 1 1
Series A 11% convertible preferred stock $.02 par value,
$1,000 liquidation preference, 34 shares outstanding 34 --
Common stock, $.02 par value; 15,000,000 shares authorized;
10,119,101 and 9,286,216 shares outstanding........ 206 186
Additional paid-in capital............................. 23,401 21,470
Accumulated deficit.................................... (18,018) (19,461)
----------- -----------
Total stockholders' equity......................... 5,624 2,196
----------- -----------
Total liabilities and stockholders' equity.........$ 71,350 $ 75,572
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Six Months
Year Ended Period Ended Year Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Nursing home services.......................$ 44,033 $ 44,440 $ 18,248 $ 38,182
Infusion therapy and other medical services. 26,661 25,440 10,476 16,196
----------- ----------- ----------- ----------
Total revenues........................ 70,694 69,880 28,724 54,378
----------- ----------- ----------- ----------
Operating expenses:
Personnel .................................. 35,284 32,955 14,493 28,689
Medical and nutritional product............. 13,224 12,001 5,300 6,714
Health care and lodging..................... 10,130 11,090 5,496 11,511
Selling, general and administrative......... 6,683 6,858 3,014 5,931
Provision for uncollectible accounts........ 447 1,210 979 1,622
Depreciation and amortization............... 1,919 1,650 366 828
----------- ----------- ----------- ----------
Total operating expenses.............. 67,687 65,764 29,648 55,295
----------- ----------- ----------- ----------
Income from operations................ 3,007 4,116 (924) (917)
Interest and dividend income..................... 104 221 183 98
Interest and other financing costs............... (6,343) (4,044) (632) (1,481)
Other income, net............................... 541 550 458 877
Minority interest in loss (earnings) of subsidiary (395) (494) 353 375
---------- ----------- ----------- ----------
Income (loss) before income taxes, and
extraordinary items................. (3,086) 349 (562) (1,048)
Provision for income taxes....................... 662 270 -- (341)
----------- ----------- ----------- ----------
Income (loss) before extraordinary items (3,748) 79 (562) (707)
Extraordinary gains ............................. 5,191 777 -- 1,058
----------- ----------- ----------- ----------
Net income ............................. 1,443 856 (562) 351
Preferred dividends.............................. (130) (70) (35) (69)
----------- ----------- ----------- ----------
Net income available to common
shareholders..........................$ 1,313 $ 786 $ (597) $ 282
=========== =========== =========== ==========
Income (loss) per share:
Income (loss) before extraordinary gains....$ (0.38) $ 0.00 $ (0.08) $ (0.09)
Extraordinary items......................... 0.51 0.09 -- 0.13
----------- ----------- ----------- ----------
Net income available to common
shareholders..........................$ 0.13 $ 0.09 $ (0.08) $ 0.04
=========== =========== =========== ==========
Weighted average number of common and common
equivalent shares........................... 10,143,203 8,418,358 7,826,309 7,783,425
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Years Ended June 30,
1997 1996 1995
---- ---- ----
(Unaudited)
Revenues
<S> <C> <C> <C>
Nursing home services............................$ 44,033 $ 44,440 $ 36,365
Infusion therapy and other medical services...... 26,661 25,440 19,679
----------- ----------- -----------
Total revenues............................. 70,694 69,880 56,044
----------- ----------- -----------
Operating expenses:
Personnel........................................ 35,284 32,955 28,698
Medical and nutritional product.................. 13,224 12,001 9,144
Health care and lodging.......................... 10,130 11,090 11,099
Selling, general and administrative.............. 6,683 6,858 6,211
Provision for uncollectible accounts............. 447 1,210 1,726
Depreciation and amortization.................... 1,919 1,650 693
----------- ----------- -----------
Total operating expenses................... 67,687 65,764 57,571
----------- ----------- -----------
Income (loss) from operations......................... 3,007 4,116 (1,527)
Interest and dividend income.......................... 104 221 229
Interest and other financing costs.................... (6,343) (4,044) (1,193)
Other income, net..................................... 541 550 995
Minority interest in loss (earnings) of subsidiary.... (395) (494) 538
----------- ----------- -----------
Income (loss) before income taxes and extraordinary gains (3,086) 349 (958)
Provision for income taxes............................ 662 270 --
----------- ----------- ----------
Income (loss) before extraordiary gains............... (3,748) 79 (958)
Extraordinary gains .................................. 5,191 777 --
----------- ----------- ----------
Net income (loss)..................................... 1,443 856 (958)
Preferred dividends................................... (130) (70) (69)
----------- ----------- -----------
Net income (loss) applicable to common
shareholders.............................$ 1,313 $ 786 $ (1,027)
=========== =========== ===========
Income (loss) per share:
Income (loss) before extraordinary gains.........$ (.38) $ 0.00 $ (0.13)
Extraordinary gains.............................. 0.51 0.09 --
----------- ----------- ----------
Net income (loss) applicable to common
shareholders..............................$ 0.13 $ 0.09 $ (0.13)
=========== =========== ===========
Weighted average number of common and
common equivalent shares......................... 10,143,203 8,418,358 $ 7,824,747
See accompanying notes to consolidated financia statements.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1997, 1996 and the Six Month Period
ended June 30, 1995 and year ended December 31, 1994
Additional Total
Preferred StockCommon StockPaid-InAccumulatedStockholder's
Shares Amount Shares Amount Capital DeficitEquity (Deficit)
------ ------ ------ ------ ------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1994..... 13,884 $ 1 7,661,439 $ 153 $ 20,065 $ (20,106) $ 113
Issuance of common stock -- -- 161,120 3 281 -- 284
Exercise of stock options -- -- 2,500 -- 1 -- 1
Additional costs related to
issurance of preferred
stock in 1993......... -- -- -- -- (52) -- (52)
Preferred dividends..... -- -- -- -- (69) -- (69)
Net income ........... -- -- -- -- -- 351 351
--------- ----- --------- ------- -------- ---------- --------
Balance,
December 31, 1994... 13,884 $ 1 7,825,059 $ 156 $ 20,226 $ (19,755) $ 628
Exercise of stock options -- -- 5,000 -- 1 -- 1
Preferred dividends..... -- -- -- -- (35) -- (35)
Net loss ........... -- -- -- -- -- (562) (562)
--------- ----- --------- ------- -------- ---------- --------
Balance,
June 30, 1995....... 13,884 $ 1 7,830,059 $ 156 $ 20,192 $ (20,317) $ 32
Exercise stock options.. -- -- 21,000 -- 21 -- 21
Debt to equity conversion -- -- 1,435,157 30 1,327 -- 1,357
Preferred dividends..... -- -- -- -- (70) -- (70)
Net income ........... -- -- -- -- -- 856 856
--------- ------------------ ------- -------- ---------- --------
Balance,
June 30, 1996....... 13,884 $ 1 9,286,216 $ 186 $ 21,470 $ (19,461) $ 2,196
New stock issued........ -- -- -- -- 100 -- 100
Exercise stock options.. -- -- 12,150 1 11 -- 12
Warrants ........... -- -- -- -- 98 -- 98
Debt to equity conversions -- -- 820,735 19 1,852 -- 1,871
Preferred Series A 11% -- 34 -- -- -- -- 34
Preferred dividends..... -- -- -- -- (130) -- (130)
Net income ........... -- -- -- -- -- 1,443 1,443
--------- ----- --------- ------- -------- ---------- --------
Balance,
June 30, 1997....... 13,884 $ 35 10,119,101 $ 206 $ 23,401 $ (18,018) $ 5,624
========= ===== ========== ======= ======== ========== =======
See accompanying notes to consolidated financial statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statement of Cash Flows
(Dollars in thousands)
Six Month
Year End Year End Period Ended Year End
June 30, 1997 June 30, 1996 June 30, 1995December 31, 1994
----------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)..........................$ 1,443 $ 856 $ (562) $ 351
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization expense . 1,919 1,537 366 828
Warrants issued ....................... 98 -- -- --
Amortization of deferred financing cost 517 266 32 104
Provision for uncollectible accounts... 447 1,210 979 1,622
Amortization of deferred income........ (72) (543) (579) (1,158)
Provision for deferred income taxes.... 172 195 -- --
(Gain) loss on foreign currency debt... (161) (130) 309 267
Extraordinary gains.................... (3,316) (693) -- --
Minority interest...................... 395 494 (353) (375)
Net gains on extinguishment of debt.... -- (84) -- (1,229)
Increase (decrease) in cash due to changes in:
Patients funds...................... (4) -- -- --
Accounts receivable................. (3,517) (5,349) (753) (1,702)
Inventories......................... 135 (310) (279) (147)
Prepaid expenses and other current assets 348 (35) 115 (158)
Other assets........................ (228) (2,755) 71 (223)
Taxes payable....................... 437 -- -- --
Accounts payable.................... 2,687 (2,174) 1,209 1,518
Other current liabilities........... 1,014 1,717 (476) 73
Other liabilities................... (16) (227) (228) (521)
---------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities............ 2,298 (6,025) (149) (750)
---------- ------------ ----------- -----------
Investing activities:
Expenditures for property and equipment.... (374) (39,848) (294) (1,021)
Acquisition of Universal Home Infusion..... (190) 2,390 -- --
Cash received on sale of facilities........ 8,116 -- -- --
Purchase by Infu-Tech of treasury stock.... -- -- -- (73)
---------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities............. 7,552 (37,458) (294) (1,094)
---------- ----------- ----------- -----------
Financing activities:
Net proceeds from not-for-profit borrowings -- -- -- 12,905
Net proceeds from long-term borrowings..... -- 47,592 -- 790
Payments on debt........................... (7,406) (1,706) (138) (14,077)
Payment of preferred dividends............. (83) (70) (35) (69)
Payments on mandatorily redeemable.........
preferred stock........................ (1,511) -- -- --
Cost of debt exchange offers............... -- -- -- (71)
Net proceeds from exercise of common
stock options.......................... 46 21 1 --
---------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities............................. (8,954) 45,837 (172) (522)
---------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 896 2,354 (615) (2,366)
Cash and cash equivalents, beginning of
the period............................. 2,900 546 1,161 3,527
---------- ----------- ----------- -----------
Cash and cash equivalents, end of
the period.............................$ 3,796 $ 2,900 $ 546 $ 1,161
---------- ----------- ----------- -----------
Supplemental disclosure of cash flow data:
Interest paid..........................$ 5,600 $ 4,292 $ 284 $ 1,483
Income taxes paid......................$ 110 $ 26 $ 26 $ 109
Non cash investing and financing activity:
Property and equipment obtained under capital
lease obligation....................$ -- $ 223 $ -- $ --
Acquisition of property and equipment for
forgiveness of receivable...........$ -- $ 7,399 $ -- $ --
Conversion of trade payable into notes.$ 904 -- -- --
Conversion of convertible notes........$ -- $ 1,357 $ -- $ --
Debt to equity conversions.............$ 1,824 $ -- $ -- $ --
Dividend conversion to common stock....$ 47 $ -- $ -- $ --
Stock issued in connection with acquisi$ion 100 $ -- $ -- $ --
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE>
CONTINENTAL HEALTH AFFILIATES, INC.
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995, an dDecember 3,1 1994
(Dollars in thousands)
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. Significant Accounting Policies
Basis of Consolidation
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");
the other 42% is publicly traded. The minority interest in the
consolidated financial statements represents the minority stockholders'
proportionate share of equity in Infu-Tech.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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 reported period. Actual results could differ from those
estimates.
New Accounting Principles
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("EPS"), which is effective as of December 31, 1997. This standard changes
the way companies compute EPS to require all companies to show "basic" and
"dilutive" EPS and is to be retroactively applied. The Company will have
to implement this at June 30, 1998. The statement will not have a material
effect on the calculation of EPS.
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 1997 and 1996 includes $512 and
$691, respectively, held by Infu-Tech. In connection with Infu-Tech's
initial public offering (see note 3), a management and non-competition
agreement between Continental and its 58% owned subsidiary, Infu-Tech,
which was extended to July 2000, prohibits Infu-Tech from lending money to
(or borrowing money from) Continental and its other subsidiaries
subsequent to December 31, 1992.
35
<PAGE>
The Company classifies all highly liquid investments with maturities of
three months or less when purchased as cash equivalents.
Reclassifications
Certain items have been reclassed in the 1996 financial statements to
conform to the 1997 financial statements.
Patients' Funds
Patients' funds represent cash balances which have been deposited by the
Company into separate bank accounts and are restricted for the use of
patients. The related liability is included in other current liabilities.
Revenue Recognition
Revenue is reported at the net amounts estimated to be realized from
patients, third-party payors and others for services rendered. The Company
receives payments for services to eligible patients under Medicare and
various state Medicaid programs. Approximately 54%, (1997), 60% (1996),
59% (1995) and 60% (1994) of total revenues were derived from such medical
assistance programs. Revenues under these programs are based upon
government approved rates which are subject to audit. In the opinion of
management, retroactive adjustments, if any, would not be material to the
Company's financial position or results of operations.
Inventories
Inventories, which consist of medical and nutritional products and
supplies, are valued at the lower of cost (first-in, first-out method) or
market.
Long-Lived Assets
Depreciation of property and equipment is computed using the straight-line
method at rates that charge the cost of various classes of assets over the
periods of expected use. The range of useful lives estimated for buildings
and improvements is generally 7 to 40 years, and the range for furniture
and equipment is three to ten years. Leasehold improvements are amortized
over the lesser of the term of the lease or the estimated life of the
asset. Goodwill is being amortized over periods ranging from 7 to 40
years.
Effective July 1, 1996 the Company adopted the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. In accordance with SFAS No. 121, the Company reviews
long-lived assets for impairment whenever events or changes in business
circumstances occur that indicate that the carrying amount of the assets
may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used on undiscounted cash flows and
measures impairment, if any, using discounted cash flows. The effect of
the adoption of SFAS No. 121 has no material effect to the Company.
Deferred Financing Costs
Deferred financing costs (included in other assets) incurred in connection
with the issuance of long-term debt are being amortized on a straight-line
basis over the term of the related debt agreements. In the event of an
early retirement of debt, these costs would be written off in an amount
relative to the amount of principal retired.
Sales of Stock by Subsidiaries
The Company recognizes income or loss on the sale of stock by its
subsidiaries.
36
<PAGE>
Income Taxes
Income taxes are provided for on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carry forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Employee Stock Options
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting
Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued
to Employees." Effective July 1, 1996 the Company adopted the Financial
Accounting Standards Board" Statement of Financial Accounting Standard No.
123 "Accounting for Stock Based Compensation." Accordingly, the Company
has elected to provide pro forma disclosures as required by SFAS No. 123.
Earnings Per Share
Earnings per share is computed based upon the weighted average number of
common shares and common share equivalents outstanding during each year.
Common share equivalents reflect the dilutive effect of stock options and
warrants. The effects of the assumed conversion of the convertible bonds
outstanding, which are also common stock equivalents, have not been
included since they are antidilutive. Earnings per common share, assuming
full dilution, were not materially different from the primary amounts.
The weighted average number of shares used in computing earnings per share
total 10,143,203 (1997), 8,418,358 (1996), 7,826,309 (1995) and 7,783,425
(1994).
3. Extraordinary Gains
Extraordinary gains reflected in the financial statements result from the
following:
Year Ended
June 30, June 30,
1997 1996
Net gains on extinguishment of debt..............$ -- $ 84
Gain on conversation of liabilities to equity.... 1,192 --
Forfeited deposit................................ 300 --
Disposal of assets............................... 3,699 693
--------- ---------
$ 5,191 $ 777
========= =========
4. Acquisitions and Dispositions
Sale of Assets
Fiscal 1996
In May 1996, the Company closed its nursing home in Pine Brook, New Jersey
and sold the assets of that nursing home, other than the land and
buildings and certain current assets, to another health care provider for
$2,390. The Company recorded an extraordinary gain of $693.
Fiscal 1997
In December 1996, the Company sold 8 acres of land contiguous to the West
Orange Facility for an extraordinary gain of $875,000.
37
<PAGE>
In June 1997, facilities in West Palm Beach, Florida and Atlantic City,
New Jersey were sold. The Company recorded an extraordinary gain of $2.1
million.
In June 1997, the Company sold its 15% interest in a limited partnership
which owned and operated a congregate care facility in Teaneck, New Jersey
for an extraordinary gain of $700,000.
Infu-Tech, Inc.
On December 31, 1992, the Company completed an initial public offering of
1,330,000 shares, at $6 per share, of its Infu-Tech subsidiary, and
received net proceeds of $6,558. Infu-Tech sold 600,000 newly issued
shares and received net proceeds of $2,923. Continental, which owned 100%
of the outstanding common stock of Infu-Tech prior to the offering, sold
730,000 shares which, together with the sale of shares by Infu-Tech,
reduced its ownership of Infu-Tech to 59%, and received net proceeds of
$3,635. As a result of this transaction, the Company realized a gain of
$3,316 on the sale of its shares of Infu-Tech. In addition, the Company
recorded a gain of $1,555 in recognition of the net increase in the value
of Continental's remaining investment in Infu-Tech.
In connection with the initial public offering, the representative of the
underwriters was issued warrants to purchase up to 133,000 shares (73,000
shares from Continental and 60,000 shares from Infu-Tech) of Infu-Tech's
common stock at 125% of the initial public offering price for a period of
four years. As of June 30, 1997, none of these warrants have been
exercised.
Nursing Home Group
In 1986, the Company, through a wholly owned subsidiary, acquired all of
the outstanding common stock of four corporations and 60% of the
outstanding common stock of a fifth corporation, each of which operates a
nursing home (the "Nursing Home Group"). The total cost of the acquisition
of the Nursing Home Group was approximately $18,415. Three individuals
(the "Principal Stockholders"), one of whom is the Company's Chairman of
the Board, who beneficially owned approximately 60% of the common stock of
the Company at the date of the acquisition, owned 100% of the common stock
of one of the five corporations and between 45% and 75% of the common
stock of the other four corporations. The Principal Stockholders received
total consideration of approximately $15,580 for their interests in the
corporations acquired. Since the Principal Stockholders controlled the
Company and the Nursing Home Group before and after the acquisition, the
Company recorded net liabilities for the Nursing Home Group based on the
Principal Stockholders' proportionate interest in the historical carrying
values of the assets and liabilities of the acquired corporations at the
date of acquisition. The aggregate consideration paid to the Principal
Stockholders was recorded as a distribution and, accordingly, a reduction
of retained earnings. The cost to acquire the minority interests in the
Nursing Home Group was allocated to the assets and liabilities of the
acquired corporations at the date of acquisition based on their respective
fair values. The excess of cost over net liabilities acquired was
allocated to goodwill.
On October 31, 1995, the Company obtained $41,000 in mortgage loans
secured by four nursing home facilities located in West Orange, Cedar
Grove and Norwood, New Jersey and West Palm Beach, Florida, and proceeds
from the issuance of subsidiary Floating Rate Series A Cumulative
Preferred Stock totalling $3,500. In addition, the Company obtained a
$1,500 loan secured by a mortgage on approximately 8 acres of land located
in West Orange, New Jersey.
The combined proceeds, totalling $46,000 were used to purchase the West
Orange, Cedar Grove and West Palm Beach facilities which were previously
operated under operating leases and to purchase the real property of the
long term and residential care facility located in Norwood, NJ (the
"Heritage Facility"), which the Company has been managing since 1988 on
behalf of a not for profit corporation ("SCF").
38
<PAGE>
Proceeds of the sale of the West Palm Beach property were used to pay down
the mortgage loans and redeem $1,000 of preferred stock. The balance of
the mortgage loan is $36,907 and $1,989 of preferred stock.
As a result of the previously noted purchase of the Heritage Facility by
the Company, the Company now owns the facility and manages the operations
of SCF. Commencing October 31, 1995, SCF is included in the consolidated
financial statements of the Company. The mortgage note receivable of
$7,399 was forgiven along with other advances in exchange for The Heritage
Facility. For the year ended June 30, 1996, SCF had revenues of $11,166
and net income of $850. For the eight months that SCF was included in the
consolidated financial statements, SCF revenues of $7,440 and net income
of $567 have been reflected.
5. Property and Equipment
Property and equipment, at cost, is comprised as follows:
June 30,
1997 1996
---- ----
Land and improvements...............................$ 6,232 $ 8,573
Buildings and improvements.......................... 41,458 44,064
Furniture and equipment............................. 3,285 4,742
Leasehold improvements.............................. 751 1,393
Construction in progress............................ 181 44
--------- ---------
51,907 58,816
Less: accumulated depreciation and
amortization..................................... 4,916 4,363
--------- ---------
$ 46,991 $ 54,453
========= =========
6. Long-Term Debt
Long-term debt is comprised as follows:
June 30,
1997 1996
---- ----
141/8% subordinated debentures due September 1, 1996 (a$ -- $ 1,200
6% notes due 2003 (b).................................. 3,400 3,400
6% convertible bonds in the face amount of 662,215
Swiss francs, due June 27, 1995 (c).................. 453 662
8% face amount of Swiss francs 619,500 due June 27, 1998 (c) 424 494
8% notes due 1999 (d).................................. 1,213 1,213
Nomura financing (e) (excludes preferred stock) (f).... 37,295 42,148
8 1/2% to 11% mortgage notes (g)......................... 2,963 3,244
Other (h).............................................. 1,067 1,568
--------- --------
46,815 53,929
Less: current portion 5,686 3,355
--------- --------
$ 41,129 $ 50,574
========= ========
(a) In August 1996, the Company made an offer to exchange shares of a new
11% Convertible Preferred Stock for all its remaining 14 1/8% Subordinated
Debentures ("Debentures") due September 1, 1996. This entire issue was converted
or redeemed. 39 <PAGE>
(b) In September 1993, the Company acquired $3,400 principal amount of
Debentures in exchange for 6% notes due 2003 ("6% Notes") in that amount. In
December 1993, the Company acquired an additional $1,500 principal amount of
Debentures in exchange for 6% convertible notes due 2003 ("6% Convertible
Notes") in the principal amount of $1,606 (which included accrued interest on
those Debentures), which were converted into the Company's common stock.
Interest on the 6% Notes is payable on March 1 and September 1.
(c) The principal balance of SFr 2,900,000 (approximately $2,525,000) and
accrued interest of SFr 174,000 (approximately $152,000) pertaining to the
Company's 6% Swiss franc denominated convertible bonds (the "Bonds") was due on
June 27, 1995. The Company did not make these payment to redeem the Bonds.
Non-payment did not result in a default under any other financing agreements.
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.
(d) In September 1993, the Company acquired SFr 4,005,000 (approximately
$2,647) principal amount of Bonds in exchange for 10,579 shares of 5%
exchangeable preferred stock ("Preferred Stock") and $965 principal amount
(which included accrued interest on those Bonds) of 8% notes due 1999 ("8%
Notes"). In October 1993, the Company acquired an additional Sfr 1,250,000
(approximately $826) principal amount of Bonds in exchange for 3,305 shares of
Preferred Stock and $248 principal amount of 8% Notes. Interest on the 8% Notes
is payable on January 27 and July 27. The Company has the option to redeem in
part or in full the 8% Notes at any time for par.
(e) On October 31, 1995, the Company obtained mortgage loans of $41.0
million and $1.5 million and subsidiaries issued $3.5 million of preferred stock
(see (f)). The proceeds of this financing were used to purchase three nursing
homes which had been sold and leased back in 1988, to reacquire the Heritage
Facility, which the Company had sold in 1990 to a non-profit corporation and had
been operating under a management agreement, and to retire debt. The $41.0
million mortgage loan bears interest at 9.86% per annum and requires payments of
principal and interest totalling $4.28 million per year for 15 years. If the
Company is unable to pay the balance of $28.19 million which will remain due at
the end of 15 years, the interest rate on the mortgage loan will increase, and
all cash flow from the mortgaged facilities will have to be used to amortize the
balance of the mortgage loan. The mortgage has been pay down by $3,484 with the
proceeds of the sale of the West Palm Beach facility. The $1.5 million mortgage
loan was paid down and the mortaged property released. The remaining balance of
the loan (now secured by a pledge of $220,000 Infu-Tech shares to cover 200% of
the loan balance) is $387.
(f) The $3.5 million of subsidiary preferred stock requires cumulative
dividends which have been charged to interest expense equal to the liquidation
preference of the preferred stock (initially $3.5 million) at LIBOR plus 13% of
the liquidation preference of the preferred stock and is mandatorily redeemable
in monthly installments at the rate of $876,000 per year in 1997 through 2000.
$1,000 of preferred stock was redeemed using the proceeds of the sale of the
West Palm Beach facility. The payments during the period from October 31, 1995
to June 30, 1996 with regard to the $42.5 million of mortgage loans and the $3.5
million subsidiary preferred stock totalled approximately $3.6 million and
$1,511 for the period July 1, 1996 to June 30, 1997. Under the terms of the $41
million loan and $3.5 million subsidiary preferred stock, the cash receipts of
the four facilities are restricted to: mortgage payments, real estate
40
<PAGE>
taxes, insurance and carrying charges, operating expenses, and payment of
preferred stock dividends, with any excess retained by the facility.
Aggregate maturities of debt relating to the October 31, 1995 refinancing
in each of five-year periods ending June 30 subsequent to June 30, 1997 are as
follows: 1998 - $1,613; 1999 - $1,269; 2000 - $906; 2001 - $570 and 2002 - $629.
(g) The 8 1/2 to 11% mortgages include debt consisting of an Economic
Development Authority mortgage loan ("EDA loan") with a principal balance of
$770 at June 30, 1997 payable in monthly installments, including interest at
11%, through 2009. The EDA loan is secured by property with a net book value of
approximately $1,519 at June 30, 1997. The remaining mortgage notes are payable
in monthly installments, including interest at notes ranging from 10% to 12%
with final payments due between 1997 and 2009. These are secured by properties
with an aggregate net book value of approximately $2,694 at June 30, 1997.
(h) On October 31, 1995, the Company negotiated terms to convert $1,464
trade accounts payable into a three year note due in 1998. The interest rate is
10%. The monthly payment of principal and interest of $47 will fully amortize
the loan at the end of the term. Current principal payments due under the terms
of the note total $691.
A secured loan ("Secured loan") with a principal balance of $67 at June 30,
1996 is payable in monthly installments of $12, scheduled to be fully paid by
December 31, 1997.
Aggregate scheduled amounts maturing in each of the five year periods
ending June 30 subsequent to June 30, 1997 are as follows: 1998 - $5,686; 1999 -
$1,510; 2000 - $2,179 and 2001 - $618 and 2002 $682.
7. Other Current Liabilities
<TABLE>
<CAPTION>
Other current liabilities are comprised as follows:
June 30,
1997 1996
---- ----
<S> <C> <C>
Accrued interest................................$ 293 $ 234
Accrued payroll and related expenses............ 3,063 3,555
Other accrued liabilities....................... 904 2,000
--------- ---------
$ 4,260 $ 5,789
========= =========
</TABLE>
Effective May 1, 1997, the nursing home group is covered under a third
party health insurance plan. Under the previous self-insured health
insurance program, the Company's estimate of its liability for both
outstanding as well as incurred but not reported claims is based upon its
historical loss experience and is included as a component of accrued
payroll and related expenses.
8. Stockholders' Equity
During the year, 125,000 warranats were issued to non exclusive finanical
consultants of the Company. The costs of the warrants has been calculated
at $54 and charged to expense. 100,000 of the warrants are two year
warrants, with 33,333 shares at our exercise price of $2.00, 33,333 at our
exercise price of $2.50, and 33.333 with our exercise price of $3.00. The
remaining 25,000 two year warrants have our exercise price $4.28.
Preferred Stock In 1993, the Company issued 13,884 shares of Preferred
Stock as part of an exchange offer to holders of its Bonds. Each share of
Preferred Stock has a liquidation preference of $100. Dividends on the
Preferred Stock are cumulative and are payable on January 27 and July 27 at
the annual rate of $5 per share, when and as declared by the Company's
Board of Directors.
s
41
<PAGE>
The Preferred Stock is exchangeable for Infu-Tech common stock at an
exchange price of $6.20 liquidation preference of Preferred Stock per
share of Infu-Tech common stock, subject to adjustment to prevent
dilution. The shares of Infu-Tech common stock issuable upon the exchange
of Preferred Stock are shares owned by Continental.
All (but not less than all) of the Preferred Stock is redeemable at the
Company's option at any time when the current market price of Infu-Tech
common stock has for at least 20 consecutive trading days been at least
120% of the exchange price, upon at least 45 days' notice at a redemption
price equal to the liquidation preference of the shares being redeemed
plus accumulated unpaid dividends on those shares. Shares may be exchanged
for Infu-Tech common stock during the 45-day period.
The Company may not pay any dividends or make any other distributions on,
or repurchase, its common stock or any other of its stock which ranks
junior to the Preferred Stock if Continental is not at the time current in
its dividend payments on the Preferred Stock.
On October 4, 1996, the Company completed an exchange offer to holders of
its 14 1/8% 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.
After the three years, the Preferred Stock will be convertible into common
stock which has a market value totaling 100% of the liquidation preference
of the Preferred Stock or for cash if the Company elects to. During the
period ended December 31, $440,000 face amount of the Series A Convertible
Preferred Stock converted into common stock of the Company, leaving
$34,000 face amount of the Series A Convertible Preferred Stock
outstanding at June 30, 1997.
42
<PAGE>
Stock Option Plans
Under Continental's incentive stock option plan adopted in 1983 (the "1983
Plan"), options to purchase 343,750 shares of common stock could have been
granted to key employees of the Company. Options which have been granted
are exercisable for a term of up to ten years. The 1983 Plan was
terminated in 1989 upon the approval by the stockholders of the 1989 Key
Employees and Key Personnel Stock Option Plan (the "1989 Plan"). No
options were granted under the 1983 Plan after July 1989.
The 1989 Plan authorizes the Company to grant stock purchase options
relating to a maximum of 400,000 shares of common stock. Options may not
be granted at a price that is less than 100% of fair market value on the
date of the grant (110% of fair market value for persons owning 10% or
more of the Company's common stock). Options become exercisable six months
after the date of the grant or after the employee has been employed for 12
months, whichever is later, and are exercisable for a term of up to ten
years.
In January 1997, the Company adopted the 1996 Key Employees and Key
Personnel Stock Option Plan which replaced the 1989 Plan. The Plan
authorized 500,000 shares and the conditions are essentially the same as
the 1989 Plan.
Stock option transactions for the years ended June 30, 1997, 1996, the six
months ended June 30, 1995 and the year ended December 31, 1994 are
summarized as follows:
Weighted Average
Number Option Price
of Shares Per Share
--------- ---------
Outstanding, December 31, 1993................. 293,775 $0.91
Cancelled (1983 Plan).......................... (8,250) $1.00
Granted (1989 Plan)............................ 26,250 $1.00
Exercised (1989 Plan).......................... (2,500) $0.25
Cancelled (1989 Plan).......................... (23,500) $2.19
--------
Outstanding, December 31, 1994................. 285,775 $0.84
Granted (1989 Plan)............................ 67,500 $1.41
Exercised (1989 Plan).......................... (5,000) $0.25
Cancelled (1989 Plan).......................... (12,225) $0.92
--------
Outstanding, June 30, 1995..................... 336,050 $0.96
Granted (1989 Plan)............................ 24,750 $1.25
Exercised (1989 Plan) ......................... (21,000) $0.65
Cancelled (1989 Plan).......................... (4,050) $0.40
--------
Outstanding, June 30, 1996..................... 335,750 $1.01
Granted (1989 Plan)............................ 147,000 $2.80
Exercised (1989 Plan).......................... (1,000) $0.94
Cancelled (1989 Plan).......................... (22,500) $1.06
--------
Outstanding June 30, 1997...................... 459,200 $1.58
========
Options to purchase 355,548 shares were available for grant at June 30, 1997
under the 1996 Plan.
43
<PAGE>
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding Average Remaining Average Exercisable at Average
Exercise Prices at 6/30/97Contractual Life Years Exercise Price6/30/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$0.25 - $1.25 191,600 4.2 $0.75 178,150 $0.81
$1.375 - $2.12 141,600 6.5 $1.51 141,600 $1.51
$2.17 - $3.50 126,000 9.3 $2.92 121,000 $3.04
--------- --------- --------- --------- ---------
459,200 6.3 $1.58 440,750 $1.65
========= ========= ========= ========= =========
</TABLE>
The Company has computed, the pro forma effects for the weighted average
fair value per option granted under the stock option plan to be $2.19 and
$.93 for 1997 and 1996, respectively. The computations were made using the
CPA model,as prescribed by SFAS No. 123, with the following weighted average
assumptions for grants in 1997 and 1996:
1997 1996
---- ----
Risk-free interest rate................. 4.9% 5.1%
Expected dividend yield................. 0% 0%
Expected term until exercise (years).... 6.9 4
Expected volatility..................... 66.67% 75.72%
Other Stock Options
In January 1994, the Company's Chairman of the Board was granted a
seven-year option to purchase 500,000 shares of the Company's common stock
for $1 per share. These non incentive options are outside the previously
noted stock option plan.
Infu-Tech Stock Option Plans
In July 1992, the Company adopted a stock option plan (the "Infu-Tech
Plan") under which it is authorized to grant stock options to designated
employees, officers and directors of the Company. The Plan authorized
grant of stock options up to a maximum of 150,000 shares of common stock.
In 1994, the maximum number of shares which may be granted under the Plan
was increased to 300,000 shares of common stock. Options may not be
granted at a price that is less than 100% of fair market value on the date
of the grant (110% of fair market value for persons owning 10% or more of
Infu-Tech common stock). Options become exercisable 12 months after the
date of the grant and are exercisable until ten years from the date of
grant.
44
<PAGE>
In January 1997, Infu-Tech adopted the 1996 Key Employees and Key
Personnel Stock Option Plan which replaced the 1992 Plan. The Plan
authorized 500,000 shares and the conditions are essentially the same as
the 1992 Plan.
Stock option transactions for the years ended June 30, 1997 and 1996, six
months ended June 30, 1995 and of the year ended December 31, 1994 are
summarized as follows:
<TABLE>
<CAPTION>
Weighted average
Number Option Price
of shares Per Share
<S> <C> <C>
Outstanding, December 31, 1993............... 122,200 $5.92
Granted ..................................... 49,750 $1.89
Cancelled.................................... (7,200) $3.89
Exercised ................................... (100) $1.00
---------
164,650 $4.79
Granted ............................... 22,000 $1.71
Cancelled ............................... (8,400) $1.75
Exercised ............................... - $0.00
---------
Outstanding, June 30, 1995................... 178,250 $4.57
Granted ............................... 60,100 $2.60
Cancelled ............................... (30,050) $2.64
Exercised ............................... (12,750) $1.21
--------
Outstanding, June 30, 1996................... 208,300 $4.37
Granted ............................... 336,242 $4.16
Cancelled ............................... (52,150) $4.25
Exercised ............................... - $0.00
--------- ---------
Outstanding, June 30, 1997................... 492,392 $4.24
========= =========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding Average Remaining Average Exercisable at Average
Exercise Prices at 6/30/97 Contractual Life Exercise Price 6/30/97 Exercise Price
(Years)
<S> <C> <C> <C> <C> <C>
$1.00 - $2.25 41,700 7.958 $1.96 41,700 $1.96
$2.875 - $4.19 158,242 9.285 $3.86 86,500 $5.10
$4.25 200,000 9.417 $4.25 200,000 $4.25
$4.44 - $6.13 92,450 5.844 $5.89 92,450 $5.89
--------- --------- --------- --------- ---------
492,392 8.580 $4.24 420,650 $4.96
========= ========= ========= ========= =========
</TABLE>
Infu-Tech accounts for its stock option plans in accordance with the
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." In 1995, the Financial
Accounting Standards Board released Statement of Financial Accounting
Standard No. 123 (SFAS 13), "Accounting for Stock Based Compensation."
SFAS 123 provides an alternative to APB 25 and was effective beginning
with the Company's 1996 fiscal year. The Company will continue to
account for its employee stock plans in accordance with the provisions
of APB 25. Accordingly, the Company has elected to provide pro forma
disclosures as required by SFAS 123.
Infu-Tech computed, pro forma disclosure purposes, the value of all
options granted under the stock option plan to be $3.41 and $2.10 for 1997
and 1996. The computations were made using the CPA model, as prescribed by
SFAS 123, with the following weighted average assumptions for grants in
1997 and 1996:
46
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate................. 4.9% 5.1%
Expected dividend yield................. 0% 0%
Expected life stock option plan (in years) 8.55 5.49
------- --------
Expected volatility..................... 68.61% 84.68%
--------- ---------
</TABLE>
If the Company had accounted for its plans and the Infu-Tech plans in
accordance with SFAS 123, the Company's net income and net income per
share would have decreased, net of taxes and minority interest as
reflected in the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
---- ----
<S> <C> <C>
Net income:
As reported............$ 1,313 $ 786
Pro forma..............$ 730 $ 730
Net income per share:
As reported............$ .13 $ .09
Pro forma..............$ .07 $ .09
</TABLE>
The pro forma effects in net income may not be representative of future
years since compensation costs are primarily attributed to the year of
grant as vesting is within one year.
47
<PAGE>
9. Related Party Transactions
At December 31, 1989, the three nursing homes controlled and partially owned
by the Principal Stockholders (including the Chairman of the Board of the
Company) owed the Company $2,804 which included amounts for supplies,
services and management fees. The Chairman of the Board of the company no
longer has an ownership interest in two of the nursing homes described
below. However, the Principal Stockholders asserted on behalf of the three
nursing homes that management fees for all years should have been limited to
amounts eligible for reimbursement from Medicare and Medicaid. Early in
1990, this dispute was resolved, with the three nursing homes agreeing to
pay a total of $1,940 in satisfaction of all their obligations to the
Company at December 31, 1989. In 1992, the settlement agreement between the
company and the three nursing homes was modified, whereby the February 1992
balance of $1,046 would be paid in sixteen equal quarterly payments of $76
(including interest at 7 1/2%) beginning June 15, 1992 and continuing
through March 15, 1996. The balance remaining on the modified settlement
agreement at December 31, 1994 and 1993 was $839 and $783, respectively. In
January 1995, the settlement agreement was further modified to provide for a
$227 principal and interest payment to be made on or before March 30, 1995
(which payment was received) and the remaining principal balance of $626 to
be paid in twelve equal quarterly payments of $60 (including interest at 8
1/2%) beginning July 1, 1995 and continuing through March 31,1 998. The $227
payment included all previously unpaid principal under the prior agreement
through December 31, 1993 and all accrued interest under that agreement
through March 30, 1995. In June 1997, a credit of $300,000 was applied
against the balance then due. The credit arose because the purchase price
obtained by the Company for the sale of the Atlantic City property was
enhanced by $300,000 due to the contemporaneous sale of a property owned by
the principal shareholders to the same buyer. The balance remaining on the
modified settlement agreement at June 30, 1997 was $326. Interest income
includes $30, $44, $27, and $56 of interest on this receivable for 1997,
1996, 1995 and 1994, respectively.
As of June 30, 1997, scheduled payments in arrears amounted to $88.
One of the Company's nursing homes was on several occasions forced to
temporarily evacuate its residents due to weather-related emergencies. The
residents were evacuated to a nursing home controlled and partially owned by
the Principal Stockholders. Management believes this course of action was
preferable to the alternatives. The Company paid the nursing home to which
the residents were evacuated at that nursing home's daily Medicaid rate.
Amounts charged to health care and lodging expenses were $0, $31 and $27 in
1997, 1996 and 1994, respectively.
In 1997, 1996, 1995 (June) and 1994, the Company was charged $46, $73, $39
and $89, respectively, by a corporation owned by the Company's Chairman of
the Board for use of an airplane owned by that corporation. The Company
believes the rates it was charged for use of that airplane were lower than
those which would have been available from an independent charter company
for use of a similar airplane.
Included in selling, general and administrative expenses in 1996, 1995
(June) and 1994 is rent expense of $326, $159 and $110, respectively, for
office space leased from an entity owned by the Principal Stockholders. The
Company no longer leases such space from the principal stockholder.
The Company administered a self-funded health plan on behalf of three
nursing homes controlled and partially owned by the Principal Stockholders
(the "Principal Stockholders' Nursing Homes"). Revenues derived from
services provided to the Principal Stockholders' Nursing Homes were $19 and
$35 in 1995 and 1994, respectively. Included in accounts receivable at June
30, 1997, 1996, June 30, 1995 and December 31, 1994 are amounts due from the
Principal Stockholders' Nursing Homes of $15, $15, $15 and $23,
respectively.
Included in the balance sheet were additional amounts due from entities
owned by the Principal Stockholders totalling $246 at June 30, 1997 and $232
at June 30, 1996, and December 31, 1994 and 1993.
48
<PAGE>
Included in other current liabilities were amounts due to an entity
controlled by the Principal Stockholders totalling $19 and $22 at June 30,
1995 and December 31, 1994, respectively.
In January 1992, the Company and Medline Industries, Inc. ("Medline")
entered into a joint venture, MedTech Uro Services ("MedTech"). This joint
venture was established as part of the settlement of a lawsuit against CHA
by Medline. In accordance with the joint venture agreement, the Company is
paid to provide sales and marketing services to MedTech. In addition, the
Company will share in the net profits of MedTech to the extent they exceed
approximately $200 per year over each of four years. The Company's
participation in MedTech allows it to market urological, tracheostomy and
other services in conjunction with its marketing of contract services to
residents of long-term care facilities This venture has terminated. There
were no such activities in 1997. During 1996, 1995, 1994 and 1993, the
Company recorded revenues under this agreement of $9, $45, $139 and $204,
respectively, which included $9 in 1996 and $45 in 1995 as its share of net
profits. Included in accounts receivable at June 30, 1996 and 1995 and
December 31, 1994 were $0, $7, $6, respectively, due from MedTech.
John A. Schepisi is the president of Senior Care Foundation, Inc., the owner
of the Heritage Facility, which is included in the consolidated financial
statements. He is also a partner in law firm which provides legal services
to the Company.
49
<PAGE>
10. Income Taxes
The provision (benefit) for income taxes on income (loss) from continuing
operations is presented below:
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Current:
Federal ........................$ 425 $ 70 $ -- $ (357)
State ........................ 90 5 -- 16
--------- --------- --------- ---------
515 75 -- (341)
-------- --------- -------- ---------
Deferred:
Federal ......................... 143 165 -- --
State ......................... 29 30 -- --
Other ......................... --
-------- --------
172 195 -- --
-------- --------- --------- --------
$ 662 $ 270 $ -- $ (341)
======== ========= ========= =========
</TABLE>
50
<PAGE>
Infu-Tech had recorded a Federal and state income tax payable of $75 which
is included in other current liabilities in the accompanying June 30,
1996.
The following table reconciles the Federal income tax provision (benefit)
computed at statutory Federal income tax rates applied to income (loss)
from continuing operations to the provision (benefit) for income taxes.
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Federal income tax provision (benefit)
at statutory rate applied to
income (loss) from continuing
operations..........................$ (1,049) $ 119 $ (197) $ (367)
State income tax provision, (benefit), net
of Federal income tax benefit....... (216) 24 (34) (63)
Extraordinary gains.................... 2,128 319
Change in valuation allowance.......... -- (203) 456 (70)
Allowance for temporary differences.... (162) -- (236) 112
Permanent difference arising from
acquisitions and dispositions....... -- -- 30
Refunds of prior years' Federal income taxes -- -- -- --
Other .............................. (39) 11 17 17
--------- --------- --------- ---------
$ 662 $ 270 $ -- $ (220)
========= ========= ========= =========
</TABLE>
The Company has approximately $7,980 of net operating tax loss
carryforwards for federal income tax purposes which will expire in the
years 2005 through 2011.
51
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
June
1997 1996
---- ----
<S> <C> <C>
Net deferred income tax assets:
Deferred income..........................................$ -- $ 154
Allowances for uncollectible accounts receivable.......... 1,743 1,878
Net operating tax loss carryforwards.................... 3,225 3,304
Cumulative unrealized losses on translation of foreign
currency debt........................................... (66) (53)
Compensated absences, principally due to accrual for
financial reporting purposes............................ 328 147
Difference between book and tax bases of investment in
subsidiary.............................................. (662) (638)
Difference between book and tax bases of property and
equipment............................................... 89 87
Other .............................................. 122 72
-------- ---------
Sub-total............................................. 4,779 4,951
Valuation allowance.......................................... (4,077) (4,077)
--------- ---------
Net deferred income tax assets..........................$ 702 $ 874
========= =========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based upon
the Company's historical losses from continuing operations before
extraordinary gains, the Company has recorded a valuation allowance of
$4,077. This represents a 100% valuation allowance for all net deferred
income tax assets, except for part of those pertaining to its 58% owned
subsidiary, Infu-Tech. Infu-Tech has historically been profitable and
anticipates taxable income in future years. In the opinion of management,
Infu-Tech will realize the net deferred income tax assets.
52
<PAGE>
11. Other Income, Net
Other income (expense) is comprised as follows:
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Gains on sales and leasebacks of
property and equipment .............$ -- $ 417 $ 516 $ 1,032
Gains (losses) on translation of foreign
currency debt....................... 161 130 (309) (267)
Amortization of deferred income related
to non-compete agreement ........... 72 126 63 126
Other, net............................. 308 (123) 188 (14)
--------- ---------- --------- ---------
$ 541 $ 550 $ 458 $ 877
========= ========= ========= =========
</TABLE>
12. Commitments and Contingencies
Lease Commitments
The Company is obligated under various operating leases for nursing
homes, office space and equipment with initial terms expiring at various
dates through 2002. The leases generally require the Company to pay all
costs of maintaining the leased properties. The Company has options to
renew certain of these leases for periods ranging from 7 to 80 years.
53
<PAGE>
The following is a schedule of future minimum annual rental payments
required under operating leases as of June 30, 1997:
<TABLE>
<CAPTION>
Year ending Nursing
June 30, Homes Office Equipment Total
<S> <C> <C> <C> <C>
1998........................ $ 314 $ 486 $ 42 $ 842
1999........................ 318 370 3 691
2000........................ 321 325 --- 646
2001........................ 286 49 --- 335
2002........................ 266 25 --- 291
Thereafter.................. 200 4 --- 204
------ ------- ----- ------
$1,705 $1,259 $ 45 $3,009
===== ===== ==== =====
</TABLE>
Rent expense was $668, $2,764, $2,058 and $3,743 in 1997, 1996, 1995 and
1994, respectively.
Contingencies
In March 1997, the Company exchanged 600,000 shares of common stock to
extinguish liabilities of $2,542 based on the fair value of shares $1,192
is reflected as an extraordinary gain in the results of operations.
The Company is obligated to issue 100,000 shares of common stock should
the share price fall below an average of $2.50 per share for 6 months
during the twelve month period immediately following the removal of the
restriction against resale.
The Company recorded as a receivable an amount of $591 based on a
settlement of Medicaid audits. The Company has received a payment of $175,
with the balance being held by a State agency to offset purported claims.
The Company has filed a legal action to enforce the settlement to receive
the balance of the settlement amount.
54
<PAGE>
Participants in the health care market are subject to lawsuits based upon
alleged negligence or similar legal theories. The Company currently has in
force general liability insurance, including professional and product
liability, with coverage limits of $10 million, which is subject to annual
renewal. The Company has not recorded any related loss liabilities as of
June 30, 1997.
In the opinion of management, the ultimate liability with respect to these
activities will not materially affect the financial position or results of
operations of the Company.
13. Distribution Agreement
In November 1994, the company entered into a distribution agreement with a
drug manufacturer under which the company provides a specific home
infusion therapy utilizing the manufacturer's drug. This agreement was
renewed in January 1997 for another year. Under this agreement, accounts
payable to the drug manufacturer ($1,649 at June 30, 1997) are secured by
the Company's inventories of the drug ($471 at June 30, 1997) and related
accounts receivable ($1,113 at June 30, 1997).
14. Business and Credit Concentrations
The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains
assignment of (or is otherwise entitled to receive) patients' benefits
payable under health insurance programs, plans or policies (e.g.,
Medicare, Medicaid, Blue Cross, health maintenance organizations, and
commercial insurance policies). At June 30, 1997, the Company had gross
receivables from the Federal Government (Medicare) of approximately $5,243
and from various state Medicaid programs of approximately $4,982.
55
<PAGE>
15. Business Segment Data
The Company's operations are conducted primarily through two business
segments: nursing home services and Infu-Tech, which provides infusion
therapy and other medical services to the non-hospital based health care
market.
Information about the Company's operations is presented below. Operating
income is comprised of total revenues less operating expenses, excluding
expenses incurred at the corporate headquarters. The elimination of
inter-segment revenues is included in other services and eliminations.
<TABLE>
<CAPTION>
Six Months Year
Years Ended Ended Ended
June 30, June 30, December 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Nursing home services...............$ 44,033 $ 44,440 $ 28,248 $ 38,273
Infu-Tech ........................ 26,003 24,114 10,601 16,289
Other services and eliminations..... 658 1,326 (125) (184)
--------- --------- --------- ----------
Consolidated......................$ 70,694 $ 69,880 $ 28,724 $ 54,378
========= ========= ========= =========
Operating income (loss):
Nursing home services...............$ 3,660 $ 4,329 $ 1,106 $ 2,263
Infu-Tech ........................ 1,793 1,745 (746) (1,024)
Expenses incurred at corporate headquarters(2,446) (1,958) (1,284) (2,156)
Interest and dividend income........... 104 221 183 98
Interest and other financing costs..... (6,343) (4,044) (632) (1,481)
Other income, net...................... 541 550 458 877
Minority interest in earnings (loss) of
subsidiary ........................ (395) (494) 353 375
--------- --------- --------- ---------
Consolidated......................$ (3,086) $ 349 $ (562) $ (1,048)
========= ========= ========= =========
Assets:
Nursing home services...............$ 54,855 $ 61,592 $ 19,487 $ 19,894
Infu-Tech........................... 11,618 9,484 7,366 7,586
Corporate........................... 4,877 7,366 2,822 3,005
--------- --------- --------- ---------
Consolidated...................... 71,350 75,572 29,675 30,485
Depreciation and amortization of property and
equipment...........................
Nursing home services.............$ 1,655 $ 1,331 $ 251 $ 625
Infu-Tech......................... 139 108 66 58
Corporate......................... 125 98 49 145
--------- --------- --------- ---------
Consolidated....................$ 1,919 $ 1,537 $ 366 $ 828
========= ========= ========= =========
Capital expenditures:
Nursing home services...............$ 298 $ 47,472 $ 267 $ 710
Infu-Tech........................... 62 19 14 98
Corporate........................... 14 101 13 213
--------- --------- --------- ---------
Consolidated......................$ 374 $ 47,592 $ 294 $ 1,021
========= ========= ========= =========
</TABLE>
56
<PAGE>
16. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
based upon available market information and appropriate valuation
methodologies. However, considerable judgement is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company might realize in a current market
exchange. The use of different market assumptions and or estimation
methodologies may have a material effect on the estimated fair value.
The carrying amounts of short term financial instruments are reasonable
estimates of their fair values. The carrying value of long term debt
approximates its fair value due primarily to the Nomura financing which
occurred recently. Interest rates have not significantly changed since
that time.
17. Fourth Quarter Adjustments and Changes in Estimates
During the year, the Company evaluated estimates for various liabilities
and accruals in the nursing home operation. The result of this review
enabled the Company to write back to income $1,252 from various
liabilities and payables not expected to be paid. Further, a settlement
with a vendor enabled the Company to reduce a liability by $460 of which
$190 was reflected in the fourth quarter.
The Company's 58% owned subsidiary Infu-Tech recorded the following
adjustments in the fourth quarter of fiscal year 1997.
Inventory
Infu-Tech recorded an inventory adjustment during the fourth quarter of
fiscal 1997. A gross amount of $450 before taxes was recorded as a
decrease to inventory with a corresponding increase to medical and
nutritional product costs. The adjustment arose as a result of a physical
inventory conducted on June 30, 1997. Infu-Tech conducted quarterly
physical inventory counts during the year. No significant differences
arose during these quarterly physical counts.
Reserve for Uncollectible Accounts
Beginning in the quarter ending March 31, 1997, Infu-Tech reviewed its
allowance for uncollectible accounts in light of its changed payor mix.
Infu-Tech's business focus is on managed care relationships which now
accounts 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. As a result
of this review, a total of $1,366 before taxes was ($348 in the quarter
ending March 31, 1997, and a further $1,018 in the fourth quarter of
fiscal 1997) was realized from the reserve for uncollectible accounts
during the year, resulting in a credit to the provision for the year of
$196 compared to a charge of $1,269 in the prior year. Based on this
analysis the Infu-Tech expects a lower provision rate to be charged
against sales going forward.
57
<PAGE>
Changes in Estimates
18. Subsequent Events
On September 15, 1997, the Company entered into an agreement to acquire a
75% interest in a to-be formed limited liability company to provide
institutional pharmacy services (LLC). The minority interest will be held
by Bach's Drug Store, a Hackkettstown, New Jersey Corporation ("Bach's")
will contribute its existing business to the LLC. CHA will pay $210 in CHA
stock to a principal of Bach's in consideration for a four-year
non-compete agreement. In addition, the LLC will enter into (a) a
four-year employment agreement (at $120/year) with the pharmacist of
Bach's who will be the manager of the LLC; and (b) a four-year lease with
the shareholders of Bach's to lease the premises (at $18/year) in which
the LLC will operate. CHA will guarantee the employment and lease
agreements.
In July and August 1997, the Company entered into commitments with First
Toronto Group for construction and financing for its Norwood and Pine
Brook, New Jersey assisted living projects
Each commitment is for up to $9,292, representing 80% of the anticipated
total approved project cost (APC). The other 20% of the APC is land
already owned by the Company. The loans will consist of a Senior Loan (65%
of APC) and a Mezzanine Loan (15% of APC), secured by a first mortgage
lien on the properties. The interest rate on the Senior loan is LIBOR plus
350 basis point, and prime plus 2% (or 12%) whichever is higher, on the
Mezzanine. The Mezzanine also provides for a participation component of
17% less interest paid. The term of the loan is for the construction phase
(or 18 months after closing if earlier) and three years. CHA will provide
a guarantee for the construction phase of the projects. In addition, CHA
will provide, with respect to each project, a standby letter of credit in
favor of the lender for $750 or, alternatively, a pledge of 650,000 shares
of CHA's Infu-Tech Stock. The commitments set a closing date of October
31, 1997 for Norwood and December 31, 1997 for Pine Brook.
58
<PAGE>
<TABLE>
<CAPTION>
Schedule II
CONTINENTAL HEALTH AFFILIATES, INC.
Valuation and Qualifying Accounts (Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Balance
beginning cost and at end
Description of period expenses Other Deductions (a) of period
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible
accounts:
1997 (June) $4,193 $ (66) $ 513 $ 388 $4,252
====== ======= ======= ===== =====
1996 (June) $3,712 $1,210 $ -- $ 729 $4,193
===== ===== ========= ===== =====
1995 (June) $3,137 $ 979 $ -- $ 404 $3,712
===== ====== ========= ===== =====
1994 (December) $3,188 $1,622 $ -- $1,673 $3,137
===== ===== ========= ===== =====
(a) Uncollectible accounts charged-off during the year, net of recoveries.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share
Year ended June 30, 1997
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Primary Earnings Per Share:
Net income available to common shareholders.....................................$ 1,313
===========
Adjustment of shares outstanding:
Weighted average number of shares outstanding................................ 9,599,657
Average net additional equivalent shares issuable............................ 543,546
------------
Weighted average number of common and common equivalent shares............... 10,143,203
============
Earnings per share..............................................................$ 0.13
===========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share
Year ended June 30, 1996
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
Primary Earnings Per Share:
<S> <C>
Net income available to common shareholders.....................................$ 786
===========
Adjustment of shares outstanding:
Weighted average number of shares outstanding................................ 8,021,638
Average net additional equivalent shares issuable............................ 396,720
------------
Weighted average number of common and common equivalent shares............... 8,418,358
============
Earnings per share..............................................................$ .09
===========
The above does not give effect to the assumed conversion of the 6% SFr
convertible bonds since the effect is antidilutive as shown below:
Net income available to common shareholders..................................$ 786
Add after tax effect of eliminating interest expense
applicable to 6% SFr convertible bonds.................................... 55
------------
Net income as adjusted.......................................................$ 841
===========
Weighted average number of common and common
equivalent shares.......................................................... 8,444,305
Additional weighted average shares from assuming
conversion of 6% SFr convertible bonds..................................... 18,758
------------
Weighted average number of common and common
equivalent shares, as adjusted............................................. 8,463,063
============
Earnings per share..............................................................$ .10
===========
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.2
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Loss Per Share
Year ended June 30, 1995
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
Primary Loss Per Share:
<S> <C>
Net loss applicable to common shareholders......................................$ (597)
===========
Adjustment of shares outstanding:
Weighted average number of shares outstanding................................ 7,826,309
Average net additional equivalent shares issuable............................ ---
-------------
Weighted average number of common and common equivalent shares............... 7,826,309
===========
Loss per share..................................................................$ (.08)
===========
The above does not give effect to the assumed conversion of the 6% SFr
convertible bonds since the effect is antidilutive as shown below:
Net loss applicable to common shareholders...................................$ (597)
Add after tax effect of eliminating interest expense
applicable to 6% SFr convertible bonds................................... 78
------------
Net loss as adjusted.........................................................$ (519)
===========
Weighted average number of common and common
equivalent shares.......................................................... 7,877,866
Additional weighted average shares from assuming
conversion of 6% SFr convertible bonds..................................... 65,540
------------
Weighted average number of common and common
equivalent shares, as adjusted............................................. 7,943,406
============
Loss per share..................................................................$ (.07)
===========
Fully Diluted Earnings Per Share:
Net loss applicable to common shareholders......................................$ (597)
===========
Weighted average number of shares outstanding................................... 7,826,309
Add: Weighted average number of shares which could have been issued upon
exercise of outstanding options.................................... 51,557
------------
Weighted average number of shares used to compute fully diluted earnings per share 7,877,866
Fully diluted loss per share....................................................$ (.08)
===========
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.3
CONTINENTAL HEALTH AFFILIATES, INC.
Calculation of Earnings Per Share
Year ended December 31, 1994
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
Primary Earnings per Share:
<S> <C>
Net income available to common shareholders.....................................$ 282
===========
Adjustment of shares outstanding:
Weighted average number of shares outstanding................................ 7,783,425
Average net additional equivalent shares issuable............................ ---
-------------
Weighted average number of common and common equivalent shares............... 7,783,425
============
Earnings per share..............................................................$ .04
===========
The above does not give effect to the assumed conversion of the 6% SFr
convertible bonds since the effect is antidilutive as shown below:
Net income available to common shareholders..................................$ 282
Add after tax effect of eliminating interest expense
applicable to 6% SFr convertible bonds.................................... 150
------------
Net income as adjusted.......................................................$ 432
===========
Weighted average number of common and common
equivalent shares......................................................... 8,033,994
Additional weighted average shares from assuming
conversion of 6% SFr convertible bonds.................................... 65,540
------------
Weighted average number of common and common
equivalent shares, as adjusted............................................ 8,099,534
============
Earnings per share..............................................................$ .05
===========
Fully Diluted Earnings Per Share
Net income available to common shareholders.....................................$ 282
============
Weighted average number of shares outstanding................................... 7,783,425
Add: Weighted average number of shares which could have been issued upon
exercise of outstanding options.............................................. 250,569
------------
Weighted average number of shares used to compute fully diluted earnings per share 8,033,994
Fully diluted earnings per share................................................$ .04
============
</TABLE>
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL HEALTH AFFILIATES, INC.
Date: September 29, 1997 By: /S/ JACK ROSEN
----------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
Principal Executive Officer:
Jack Rosen /S/ JACK ROSEN
Chairman of the Board
Principal Financial Officer:
S. Colin Neill /S/ S. COLIN NEILL
Vice President and Chief Financial
Officer
Directors:
Jack Rosen /S/ JACK ROSEN
Joseph Rosen /S/ JOSEPH ROSEN
Israel Ingberman /S/ ISRAEL INGBERMAN
Joseph M. Giglio /S/ JOSEPH M. GIGLIO
Bruce Slovin /S/ BRUCE SLOVIN
Carl D. Glickman /S/ CARL D. GLICKMAM
64
<PAGE>
Exhibit 10(e)
CONTINENTAL HEALTH AFFILIATES, INC.
1996 KEY EMPLOYEES AND KEY PERSONNEL STOCK OPTION PLAN
December 16, 1996
1. Purpose of the Plan.
The purpose of this 1996 Stock Option Plan (the "Plan") is to further
the growth of Continental Health Affiliates, Inc. ("CHA" and together with its
Subsidiaries, the "Company") by offering directors and key employees of the
Company upon whom the Company largely depends for the successful conduct of its
business an incentive to continue in the employ, or to be directors, of the
Company, and to increase the interest of those directors and employees in the
Company's success through ownership of its common stock.
2. Definitions.
Whenever used in this Plan, the following terms will have the meaning
set forth below:
(a) "Code" means the Internal Revenue Code of 1986, as amended.
(b) "Committee" means the committee referred to in Sections 4 and 5.
(c) "Employee" means any person employed by the Company (including, without
limitation, directors).
(d) "Fair Market Value" means the mean of the high and low prices at which
the Stock is reported to have traded in the principal market (whether an
interdealer quotation system or consolidated trading on a stock exchange) in
which the Stock is traded, or if there is no trade on a particular date, the
Fair Market Value will mean the mean of the low asked and high bid prices in
that market on that date.
(e) "Granting Date" means the date on which the Option is made effective by
the Committee.
(f) "Incentive Stock Option" means any Option that at the time of the grant
is an incentive stock option as that term is defined in Section 422A of the
Code.
(g) "Involuntary Termination of Employment" means a Termination of
Employment for a reason other than death, Retirement, Total Disability,
voluntary resignation with the written consent of the Company or Termination of
Employment for Cause.
(h) "Non-Qualified Option" means any Option that is not an Incentive Stock
Option.
(i) "Option" means any option granted by the Committee under the Plan.
(j) "Retirement" means a Termination of Employment by reason of an
Employee's retirement, other than by reason of Total Disability, at a time when
the Employee's years of service with the Company plus his chronological age
equals sixty-five or more.
(k) "Stock" means the common stock, par value $.02 per share, of CHA.
(l) "Subsidiary" means any "subsidiary corporation" of Continental Health
Affiliates, Inc., as that term is defined in Section 425(f) of the Code.
(m) Termination of Employment" means (i) as to an employee, the time when
the employee- employer relationship between the employee and the Company ceases
to exist for any reason, including, but not limited to, a termination by
resignation, discharge, death, Total Disability or Retirement, and (ii) as to a
director, the time the person ceases to be a director of the Company.
(n) "Termination of Employment for Cause" means an Involuntary Termination
of Employment by reason of an Employee's (i) repeated failure or refusal to
perform the duties and responsibilities of his position; (ii) dishonesty
affecting the Company; (iii) drunkenness or use of illegal drugs which
interferes with his performance and continues after warning, or (iv) material
breach of loyalty to the Company. All determinations of whether or not a
Termination of Employment is "For Cause" will be made by the Committee on the
basis of such evidence as the Committee deems necessary or desirable.
(o) "Total Disability" means inability of an Employee, by reason of
physical condition or mental illness or accident, to perform substantially all
the duties of the position at which the Employee was employed by the Company
when the disability commenced. All determinations as to the date and extent of
disability of any Employee will be made by the Committee on the basis of such
evidence as the Committee deems necessary or desirable.
3. Effective Date of the Plan.
The effective date of the Plan will be December 16, 1996.
4. Administration of the Plan.
The Board of Directors of CHA or such committee as the Board may
designate will implement the provisions of the Plan, be responsible for the
administration of the Plan and grant Options under the Plan. However, only the
Board of Directors may grant options to officers or directors. The Board of
Directors or the committee which performs the functions described in the first
sentence of this Paragraph is referred to in this Plan as the "Committee."
Subject to the express provisions of the Plan, the Committee will also have full
authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it and to make all other determinations it deems
necessary or advisable in administering the Plan. All actions taken and
decisions made by the Committee under the Plan will be binding and conclusive on
all Employees eligible to participate in this Plan and on their legal
representatives and beneficiaries. Unless the Board of Directors is the
Committee, the Committee may not amend the Plan. No member of the Committee will
be liable for any act or omission in connection with the administration of the
Plan unless it is attributable to that member's willful misconduct.
5. The Committee.
The Committee will consist of not less than three members of the Board
of Directors of the Company. If the Committee is not the Board of Directors, (i)
the Committee will hold its meetings at such times and places as it determines
and will maintain written minutes of its meetings, (ii) a majority of the
Committee's members present in person will constitute a quorum of the Committee,
(iii) all determinations of the Committee will be made by the majority vote of
its members, (iv) the members of the Committee may participate in a meeting of
the Committee by conference telephone or similar communications equipment by
means of which all members participating in the meeting can hear each other, and
participation in a meeting in that manner will constitute presence in person at
the meeting, and (v) any decision or determination reduced to writing and signed
by all the members of the Committee will be as effective as if it had been made
by a majority vote if its members at a meeting which is duly called and held.
66
<PAGE>
6. Stock Subject to the Plan.
The maximum number of shares of Stock may be issued upon exercise of
Options granted under the Plan is 500,000 shares, subject to adjustment as
provided in Section 8 of this Plan. The maximum number of shares of Stock which
may be issued to directors of the Company (whether or not Employees) upon
exercise of Options granted under the Plan is 250,000 shares, subject to
adjustment as provided in Section 8. Upon the exercise of any Option, the
Company will be deemed to have issued the number of shares to which the Option
relates. If any Option expires, terminates or is cancelled for any reason
without having been exercised in full, the number of shares of Stock to which
the Option related which were not issued upon exercise of the Option will again
be available for issuance under the Plan.
7. Stock Options.
(a) Time of Granting of Options. The effective date of the grant of an
Option will be the date specified by the Committee in its determination or
designation relating to the award of that Option.
(b) Eligibility/Grant Options. No Option will be exercisable unless the
optionee has (i) been in the employ of the Company for twelve full months, and
(ii) been in the employ of the Company for six full months from the Granting
Date to the time of exercise of an Option (except for such exercises of an
Option after termination of employment as are permitted under Paragraphs 7(f),
7(g) and 7(h)). Except as provided in the preceding sentence, the Committee will
have full authority to determine the individuals to whom and the time or times
at which Options will be granted, the number of shares of Stock subject to each
Option, the term of the, Option, the terms under which the Option may be
exercised (which may include provisions regarding the earliest time or times
when the Option may be exercised as to some or all the Stock to which it
relates), the Option exercise price per share, whether the Option will be an
Incentive Stock Option or a Non-Qualified Option, and the other terms and
provisions of the Option. Options granted under this Plan may have dissimilar
terms and conditions.
(c) Exercise Price/Payment. Except as provided in Section 8, the
exercise price of each Option will be determined by the Committee, but will not
be less than 100% of the Fair Market Value of the Stock on the Granting Date of
that Option. At the time of exercise of an Option, the person exercising the
Option will tender payment to CHA of the entire exercise price with regard to
the shares of Stock to be purchased by certified check or, alternatively, by
tendering stock of CHA with a Fair Market Value equal to the amount of the
exercise price on the date of tender. The Company may not extend credit, or
guarantee the extension of credit, to any person for the purpose of enabling
that person to exercise an Option.
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<PAGE>
(d) Term of Options; Terms of Exercise. The term of each Option will be
determined by the Committee, but will not be longer than ten years from the
Granting Date, and, in the case of an Employee who, at the time the Option is
granted, owns more than 10% of the total combined voting power of all classes of
stock of CHA, will not be longer than five years from the Granting Date.
An Employee will exercise an Option by giving written notice of exercise
to CHA at its principal executive office, to the attention of the Secretary,
accompanied by full payment of the exercise price or tender of Stock as provided
in Section 7(c). The date CHA receives the written notice of exercise
accompanied by payment of the exercise price of this Plan will be the date on
which the Option is exercised. As soon as practicable after the date on which an
Option is exercised, CHA will deliver to the Employee a certificate or
certificates for the number of shares of Stock purchased by the exercise,
registered in the name of the Employee.
(e) Nontransferability of Options. During the lifetime of the holder of
an Option, the Option by its terms may be exercised only by the holder or his
guardian or legal representative. An Option may not be assigned, pledged or
hypothecated in any way, may not be subject to execution, and may not be
transferred otherwise than by will or the laws of descent and distribution. Any
attempt at assignment, transfer, pledge, hypothecation or other disposition of
an Option contrary to the provisions of the Plan, and a levy of any attachment
or similar process upon any Option, will be null and void.
(f) Retirement/Involuntary Termination of Employment of Holder of
Option. In the event of Termination of Employment of an Employee to whom an
Option has been granted by reason of his Retirement (other than for Total
Disability), or Involuntary Termination of Employment, the Option will expire at
the end of the three-month period immediately following the date of the
Termination of Employment, or on such earlier date as is the expiration of the
term specified in the Option.
68
<PAGE>
(g) Total Disability of Holder of Option. In the event of Termination of
Employment of an Employee to whom an Option has been granted by reason of the
Employee's Total Disability, the Employees Option will expire at the end of the
twelve-month period following the date of the Termination of Employment, or such
earlier date as is the expiration of the term specified in the Option.
(h) Death of Holder of Option. In the event of Termination of Employment
of an Employee to whom an Option has been granted by reason of his death, or if
a former Employee dies before all the Options granted to the former Employee
have expired, that person's outstanding Options may be exercised by the person's
personal representatives, or by the persons to whom the right to exercise the
Options has passed by will or through the laws of descent and distribution,
during the twelve-month period immediately following the date of death, or until
such earlier date as is the expiration of the term specified in the Option.
(i) Termination of employment of Holder of Option. In the event of
Termination of Employment of an Employee to whom an Option has been granted for
any reason other than his Retirement, Involuntary Termination of Employment,
Total Disability or death, all that Employee's Options will terminate when the
Termination of Employment occurs.
(j) Liquidation. If the Company is to be liquidated or dissolved, then
the time at which all Options then outstanding may be exercised will be
accelerated and all those Options will become exercisable in full ten days
before the effective time (the "Effective Time") of the liquidation or
dissolution or such earlier time as may be fixed by the Board ("Effective
Time"), and Options not exercised by the Effective Time will automatically be
cancelled and be of no further force or effect. Nothing in this Subsection (j),
however, will extend the term specified in an Option.
(k) Incentive Stock Options. No Incentive Stock Option may be granted to
a director who is not an Employee. No Incentive Stock Option may be granted
after ten years from the earlier of the date the Plan is adopted by the Board,
or the date the Plan is approved by the stockholders of the Company. Incentive
Stock Options may not be granted to any Employee who, at the time the Option is
granted, owns more than ten percent of the total combined voting power of all
classes of stock of CHA, unless (i) the purchase price of the Stock under the
Incentive Stock Option is at least 110 percent of the Fair Market Value of the
Stock on the Granting Date and (ii) the Incentive Stock Option by its terms is
not exercisable after the expiration of five years from the Granting Date. The
aggregate Fair Market Value (determined at the time an Incentive Stock Option is
granted) of the Stock with respect to which Incentive Stock Options are first
exercisable by an Employee during any calendar year (under this Plan and any
other incentive stock option plan of the Company) will not exceed $100,000.
69
<PAGE>
(l) Option Grant Agreement. Promptly after an Option is granted to an
Employee or a director, the Company will send the Employee or director an
agreement setting forth the terms and conditions of the grant. Each Option
granted must be clearly identified as either a Non-Qualified Option or an
Incentive Stock Option. In the case of an Incentive Stock Option, the agreement
will contain such terms and provisions as the Committee may determine to be
necessary or desirable in order to qualify the Option as an incentive stock
option in accordance with Section 422A of the Code or any successor to that
Section.
8. Recapitalization, Reorganization or Other Corporate Event.
If CHA, through a stock dividend, a stock split or a share combination,
changes its issued stock into a number of shares which is 10% or more greater or
less than it was prior to the change, then immediately after the record date for
the change, the number of shares of Stock subject to each outstanding Option,
and the maximum number of shares of Stock which may be issued in total, and
which may be issued to directors of the Company, on exercise of Options issued
under the Plan will be increased proportionately in the case of a stock dividend
or stock split, or decreased proportionately in the case of a combination of
shares to prevent dilution or enlargement of rights (but without any obligation
to issue fractional shares), and the purchase price of each share of Stock
subject to each immediately after the change will be the same as the total
purchase price of all the Stock subject to the Option immediately before the
change.
If because of one or more recapitalization, reorganizations or other
corporate events, the holders of the outstanding Stock receive something other
than shares of Stock, upon exercise of an Option the holder of the Option will
receive what the holder would have owned if the holder had exercised the Option
immediately before the first such corporate event and not disposed of anything
the holder received as a result of the corporate event.
9. Rights of Employee.
(a) Stockholder. An Employee will have no rights as a stockholder by
reason of having been granted an Option. Upon the exercise of an Option, the
Employee will have no rights as a stockholder until the issuance of Stock to the
Employee has been recorded in the books of CHA.
(b) Employment. Nothing in the Plan or in the grant of an Option will
confer upon any Employee the right to continue in the employ of the Company or
will interfere with or restrict in any way the rights of the Company to
discharge any Employee at any time for any reason whatsoever, with or without
cause.
10. Laws and Regulations.
The obligation of the Company to issue shares of Stock upon exercise of
Options will be subject to:
(a) the condition that counsel for the Company is satisfied that the
sale and delivery will be in compliance with the Securities Act of 1933, as
amended, and all other applicable laws, rules or regulations; and
(b) the condition that the shares of Stock reserved for issuance under
the Plan have been authorized for listing on any securities exchange or
exchanges on which the Stock is listed.
70
<PAGE>
11. Withholding of Taxes.
In order to satisfy the withholding tax obligations imposed by any level
of government, the Company may in its discretion (i) withhold shares of Stock
purchased by exercise of an Option, (ii) require payment by the Employee of a
sum equal to any sum which must be withheld (and, if the Stock has not been
issued, refuse to issue Stock on exercise of an Option until the Employee pays
that sum), or (iii) deduct the sum which must be withheld from one or more
installments of compensation payable to the Employee. If an Employee makes an
election under Section 83(b) of the Code in connection with the exercise of an
Option, the Employee will immediately notify the Company of that election. In
the case of an Incentive Stock Option, an Employee who disposes of shares of
Stock acquired through exercise of an Option either (a) within two years after
the Granting Date of the Incentive Stock Option or (b) within one year after the
issuance of the Stock to the Employee, will notify the Company of the
disposition and the amount realized upon the disposition.
12. Amendment of the Plan.
The Board of Directors may at any time and from time to time modify or
amend the Plan in any respect to be effective as of the date determined by the
Board; provided, however, that without the approval of the stockholders of CHA
the Board will not (i) except as provided in Section 8 of this Plan, increase
the maximum number of shares of Stock which may be issued under the Plan in
total or which may be issued to directors of the Company; (ii) change the
categories of Employees eligible to receive Options; (iii) extend the period
during which Options may be exercised; (iv) change the provisions fixing the
minimum option price; or (v) change the provisions as to termination of Options.
No modification or amendment of the Plan may adversely affect the rights of a
holder of an outstanding Option without the holder's consent.
13. Termination of the Plan.
The Board of Director's may at any time suspend or terminate the Plan,
provided that no such action may adversely affect the rights of a holder of an
outstanding Option without the holder's consent.
The Plan will automatically terminate if it is not approved by the
stockholders of CHA within one year after its effective date. Any Option granted
before this Plan is approved by the stockholders of CHA will (i) be subject to
the stockholders of CHA approving this Plan within one year after its effective
date, and (ii) not be exercisable until this Plan is approved by the
stockholders of CHA.
71
<PAGE>
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