================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
Commission File No.0-15893
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Nevada 91-1256470
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
38 Pond Street, Suite 305
Franklin, Massachusetts 02038
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 520-2422
Securities registered pursuant to section 12(g) of Act:
Common Stock, $.012 Par Value
(Title of Class)
Common Stock
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. |_|
Indicate by check mark whether the registrant (l) 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). (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Registrant's revenues for its most recent fiscal year. $ 8,617,798
State the aggregate market value of the common voting stock held by
non-affiliates of the Registrant. (The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.)
$2,116,175 as of March 1, 1996
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date (applicable only to Corporate
Registrants.)
14,002,306 Common Shares as of March 1, 1996
Documents incorporated by reference: list the following documents if
incorporated by reference and the part of the Form 10-KSB into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933.
(The listed documents should be clearly described for identification purposes.)
Transitional Small Business disclosure format. Yes ___ No _X_
================================================================================
1
<PAGE>
PART I
Item 1. Business
General
Consolidated Health Care Associates, Inc., a Nevada corporation (hereinafter
referred to as the "Company" or "CHCA"), is in the business of providing
outpatient rehabilitation services, through a network of outpatient clinics and
contract agreements respectively, principally concentrated in the Northeast and
Mid-Atlantic regions, six in Massachusetts, four in Pennsylvania, three in
Delaware and one in Florida. The Company also provides managed rehabilitation
services through contract staffing principally in Massachusetts, Pennsylvania,
Florida, Delaware and New York.
The Company was organized in June 1984. Its executive offices are located at 38
Pond Street, Franklin, Massachusetts, 02038 and its telephone number is (508)
520-2422. References to "CHCA" and the "Company" include Consolidated Health
Care Associates, Inc., and its subsidiaries and its predecessor, unless the
context otherwise requires.
Financial Information about Industry Segments
The Company presently operates in a single segment, as a health care service
provider.
Outpatient Rehabilitation Services
The clinics provide pre and post-operative care and treatment for a variety of
orthopedic-related disorders, sports related injuries, treatment for
neurologically related injuries, rehabilitation of injured workers and
preventative care. A patient who is referred to one of the Company's
rehabilitation facilities undergoes an initial evaluation and assessment process
that results in the development of a rehabilitation care plan designed
specifically for that patient.
Rehabilitation services provided by the Company include the following:
Conventional Clinical Services
All facilities provide routine acute clinical therapy services. Services include
preventive and rehabilitative services for neuromuscular, musculoskeletal and
cardiovascular injury or disease. Patients treated are referred by physicians.
Licensed physical therapists evaluate each patient and initiate a program of
rehabilitation to achieve each individual patient's rehabilitation goals.
Treatments or modalities rendered may include traction, ultrasound, electrical
stimulation, therapeutic exercise, heat treatment and hydrotherapy. The
Company's charge for its services is based upon the specific treatments
rendered. Patients requiring such services are usually treated for one hour per
day, three days per week over a period of two to five weeks. Additionally,
wherever appropriate, post treatment maintenance and exercise programs are
provided to patients to continue their recovery on a cost effective basis.
Occupational/Industrial Services
At several of the Company's facilities, specific programs for the injured
workers compensation patient are rendered. Services unique to the injured worker
are as follows:
Work Capacity Evaluation (WCE) - WCE is an intensive, objective evaluation
of the injured worker's physical condition and capacity to perform the
specific requirement of the worker's employment. This evaluation is often
used by insurers to estimate the extent of rehabilitation treatment or as a
basis for settlement of disability claims.
2
<PAGE>
Work Hardening - After the acute-care phase of an injury and often as an
outcome of a WCE, there is a transitional need for the injured worker to
regain the physical capacity to safely perform employment requirements.
Work hardening provides graduated exercise and work stimulation therapies
to rehabilitate the injured worker. Patients in the Company's work
hardening program gradually build up their treatment time from three to
seven hours per day, five days per week for a four to six week period.
Industry Background
Physical and occupational therapy is the process of aiding in the restoration of
individuals disabled by injury, disease or recovering from surgery. Management
believes that the following factors are influencing the growth of outpatient
physical and occupational therapy services:
Economic Benefits of Physical and Occupational Therapy Services. Purchasers
and providers of health care services such as insurance companies, health
maintenance organizations, business and industry, are seeking ways to save
on traditional health care services. Management believes physical and
occupational therapy services represent a cost-effective service, by
attempting to prevent short-term disabilities from becoming chronic
conditions, and by speeding the recovery from surgery and musculoskeletal
injuries.
Earlier Hospital Discharge. Changes in health insurance reimbursement, both
public and private, have encouraged the early discharge of patients in
order to contain and reduce costs. Management believes early hospital
discharge practices foster greater numbers of individuals requiring
outpatient physical and occupational therapy services.
Marketing
At each clinical location, the Company focuses its marketing efforts on
physicians, mainly orthopedic surgeons, neurosurgeons, physiotrists,
occupational medicine practitioners, and general practitioners, which generally
account for the majority of physical and occupational therapy referrals. In
marketing to the physician community, the clinics emphasize their commitment to
quality patient care and communication with physicians regarding patient
progress. On a regional and corporate level, the Company seeks to improve and/or
establish provider relationships with health maintenance organizations,
preferred provider organizations, industry and case managers and insurance
companies.
Sources of Revenue/Reimbursement
Payor sources for the Company's services are primarily commercial health
insurance, managed care programs, workers' compensation insurance, Medicare and
proceeds from personal injury cases. Commercial health insurance and managed
care programs generally provide outpatient services coverage to patients
utilizing the clinics, and the patient is normally required to pay an annual
deductible and a co-insurance payment. Workers' compensation is a statutorily
defined employee benefit which varies on a state by state basis. Workers'
compensation laws generally require employers to pay for employees' costs of
medical rehabilitation, lost wages, legal fees and other costs associated with
work-related injuries and disabilities and, in certain jurisdictions, mandatory
vocational rehabilitation. These statutes generally require that these benefits
be offered to employees without any deductibles, co-payments or cost sharing.
Companies may provide such coverage to their employees through either the
purchase of insurance from private insurance companies, participation in
state-run funds or through self-insurance. Treatments for patients who are
parties to personal injury cases are generally paid for from the proceeds of
settlements with insurance companies.
Thirteen of the Company's clinics have been certified as Medicare providers.
Medicare reimbursement for outpatient physical and/or occupational therapy
furnished by a Medicare-certified rehabilitation agency is equal to the lesser
of the provider's "reasonable costs" as allowed under Medicare regulations or
the provider's customary charges. Individual beneficiaries, or their "Medigap"
insurance carriers if such coverage exists, are required to pay a deductible and
co-payment amount, so that governmental payments to the Company do not exceed
80% of the reasonable costs of such services. The Company files annual cost
reports for each of its Medicare-certified clinics.
3
<PAGE>
These cost reports serve as the basis for determining the prior year's cost
settlements and interim Medicare payment rates for the next year. Medicare
regulations require that a physician must certify the need for physical and/or
occupational therapy services for each patient and that these services must be
provided in accordance with an established plan of treatment which is
periodically revised. State Medicaid programs generally do not provide coverage
for outpatient physical and occupational therapy and, therefore, Medicaid is not
and is not expected to be a material payor for the Company.
Managed Rehabilitation Services
The Company's managed rehabilitation services division is a contract staffing
division which provides physical, occupational and speech therapy on a
contracted basis typically under intermediate term and long term contracts to
schools, hospitals, nursing homes, assisted living facilities and home health
care companies. In addition to hiring therapists locally, the Company has
established international sources of highly trained, duly licensed therapists
who may provide services in the United States. The managed rehabilitation
division has grown rapidly since its formation in September 1994. The contract
services industry has experienced dramatic growth over the last decade.
Regulation
The health care industry is subject to numerous federal, state and local
regulations. The states in which the Company currently operates do not prohibit
the Company from providing physical therapy services. Many states prohibit
commercial enterprises from engaging in the corporate practice of medicine.
There is a risk that the corporate practice of medicine could be interpreted in
those states to include the practice of physical therapy also, or that the
corporate practice of physical therapy itself could be specifically prohibited
in some states. In the event that the Company was found to be engaged in a
prohibited practice in any state, the Company would be required to restructure
its operations so as to be in compliance with applicable law. However, if the
Company were to seek to expand its operations to other states in which physical
therapy services could not be provided by a corporation, it would be required to
seek other arrangements in such states, which could increase the costs to the
Company.
Certain states in which the Company operates have laws that require facilities
that employ health professionals and provide health related services to be
licensed. The Company believes that the operations of its business, as presently
conducted, do not and will not require certificates of need or other approvals
and licenses. There can be no assurance, however, that existing laws or
regulations will not be interpreted or modified to require the Company to obtain
such approvals or licenses and, if so, that such approvals or licenses could be
obtained.
Thirteen of the Company's clinics are certified Medicare providers. In order to
receive Medicare reimbursement, a clinic must meet the applicable conditions for
participation set forth by the Department of Health and Human Services relating
to the type of facility, its equipment, recordkeeping, personnel and standards
of medical care as well as compliance with all state and local laws. Clinics are
subject to periodic inspections to determine compliance.
The Social Security Act imposes criminal sanctions and/or penalties upon persons
who pay or receive any "remuneration" in connection with the referral of
Medicare or Medicaid patients. The "anti-kickback" laws prohibit providers and
others from offering or paying (or soliciting or receiving), directly or
indirectly, any remuneration to induce or in return for making a referral for,
or ordering or recommending (or arranging for ordering or recommending) a
Medicare-covered service. Each violation of these rules may be punished by a
fine (of up to $250,000 for individuals and $500,000 for corporations, or twice
the pecuniary gain to the defendant or loss to another from the illegal conduct)
or imprisonment for up to five years, or both. In addition, a provider may be
excluded from participation in Medicaid or Medicare for violation of these
prohibitions through an administrative proceeding, without the need for any
criminal proceeding. Many states have similar laws, which apply whether or not
Medicare or Medicaid patients are involved.
Because the anti-kickback laws have been broadly interpreted to apply where even
one purpose (as opposed to a sole or primary purpose) of a payment is to induce
referrals, they limit the relationships which the Company may have
5
<PAGE>
with referral sources, including any ownership relationships. The anti-kickback
laws may also apply to the structure of acquisitions by the Company of
physician-owned physical therapy clinics, to the extent that any portion of the
purchase price or terms of payment are deemed to be an inducement to the
physician to make referrals to the clinic which, under a recent letter of the
Office of Chief Counsel of the Department of Health and Human Services Inspector
General, could include payments for goodwill. Management considers these
anti-kickback laws in planning its clinic acquisitions, marketing and other
activities, and believes its operations are and will continue to be in
compliance with applicable law, but no assurance can be given regarding
compliance in any particular factual situation, as there is no procedure for
obtaining advisory opinions from government officials.
In addition, another federal law, known as the "Stark law" after its original
Congressional sponsor, was expanded in 1993 to impose, effective January 1,
1995, a prohibition on referrals of Medicare or Medicaid patients for physical
therapy services by physicians who have a financial relationship with the
provider furnishing the services. With certain specified exceptions, the
referral prohibition will apply to any physician who has (or whose immediate
family member has) a direct or indirect ownership or investment interest in, or
compensation relationship with, a provider of physical therapy services such as
the Company's clinics. This law also prohibits billing for services rendered
pursuant to a prohibited referral. Penalties for violation include denial of
payment for the services, significant civil monetary penalties, and exclusion
from Medicare and Medicaid. Several states have enacted laws similar to the
Stark law, but which cover all patients as well. The Stark law, as effective
January 1, 1995 covers any financial relationship between the Company and
referring physicians, including any financial transaction resulting from a
clinic acquisition. As with the anti-kickback law, management will consider the
Stark law in planning its clinic acquisitions, marketing and other activities,
and expects that is operations will be in compliance with applicable law.
However, as noted above, no assurance can be given regarding compliance in any
particular factual situation, as there is no procedure for obtaining advisory
opinions from government officials.
Competition
The health care industry generally and the physical and occupational businesses
in particular are highly competitive and subject to continual changes in the
manner in which services are delivered and in which providers are selected. The
competitive factors in the physical and occupational therapy businesses are
quality of care, cost, treatment outcomes, convenience of location, and
relationships with and ability to meet the needs of referral and payor sources.
The Company's clinics compete directly or indirectly with the physical and
occupational therapy departments of acute care hospitals, physician-owned
physical therapy clinics, private physical therapy clinics, and chiropractors.
Discontinued Operations - Diagnostic imaging services
From inception, the Company provided diagnostic imaging services and equipment
under contracts to hospitals under both mobile and fixed base arrangements.
Through its merger in July 1991 with PTS, the Company began to provide inpatient
and outpatient rehabilitation services pursuant to contracts with hospitals.
Effective March 26, 1993, the Company's Board of Directors approved and adopted
a plan to discontinue its diagnostic imaging services division and sold all
related assets, except accounts receivable, effective September 30, 1994.
Company Facilities
The Company currently operates fourteen outpatient rehabilitation facilities all
of which are leased facilities typically located in a medical office building or
shopping center. The Company's typical clinic occupies approximately 1,200 to
7,500 square feet of space with an average of approximately 3,200 square feet of
space per location. Each clinic employs one or more licensed physical and/or
occupational therapists, including a therapist who is the facility manager,
office personnel, aides and, at certain clinics, athletic trainers, exercise
physiologists and other appropriate personnel, as may be necessary.
6
<PAGE>
Set forth below is certain information concerning the Company's outpatient
facilities as of March 15, 1996.
Outpatient Rehabilitation Facilities
Location Sq. Ft. Year Opened
-------- ------- -----------
Attleboro, MA 2,800 1971
Attleboro, MA 1,400 1991
Leominster, MA 3,400 1990
Pittsfield, MA 2,500 1992
West Bridgewater, MA 3,500 1978
Worcester, MA 1,200 1992
Philadelphia, PA 7,000 1992
Millersburg, PA 7,500 1993
Mechanicsburg, PA 3,700 1993
Shermans Dale, PA 2,700 1993
Wilmington, DE 1,600 1993
Newark, DE 3,900 1993
Newark, DE 1,700 1993
Boca Raton, FL 2,000 1992
Most of the above facilities were acquired by the Company after they had been
opened by their original owners.
Employees
As of March 15, 1996, the Company employed 160 full and part-time persons, 117
of whom were licensed therapists, assistants, and aides at the Company's
outpatient facilities, 28 people function in administrative capacities at such
outpatient facilities and the executive office employs 15 persons. None of the
Company's employees are represented by a labor union, and the Company is not
aware of any current activities to unionize its employees. Management of the
Company considers the relationship between the Company and its employees to be
good.
In the states in which the Company's current clinics are located, persons
performing physical and occupational therapy services are required to be
licensed by the state. All persons currently employed by the Company and its
clinics who are required to be licensed are licensed, and the Company intends
that all future employees who are required to be licensed will be licensed.
Management is not aware of any federal licensing requirements applicable to its
employees. The Company carries professional liability insurance for its licensed
personnel.
7
<PAGE>
Executive Officers
Joel Friedman, age 55 became a director of the Company in December 1991 and
Chairman and Chief Executive Officer in July 1994. Mr. Friedman, a graduate of
Columbia College, has been involved for the past twenty five years in the
financing and management of several public and private companies and real estate
ventures, most recently, and for at least the past five years through Friedman
Enterprises, Inc. Mr. Friedman is also a member or the Board of Directors of 3D
Geophiscal, Inc.
Alan Mantell, age 49 was elected Chief Operating Officer in November 1995. Since
1979, Mr. Mantell has shared responsibilities with Mr. Friedman as an officer,
director and shareholder of Founders. From 1980 through 1987, Mr. Mantell was
the sole stockholder of Stuyvesant Capital Corporation, an N.A.S.D. member firm.
In 1992 he formed Guardian Capital Group, Ltd., an early participant in the
commercial mortgage-backed securities markets which operated one of the first
multi-family mortgage conduits in the U.S.
Robert M. Whitty, age 40 was elected President in November 1995. Mr Whitty had
been a vice president of the Company since 1994, and prior thereto, Mr Whitty
provided consulting services for various health care companies, which services
included financial planning, strategic planning, acquisitions and business
development. Mr Whitty has over eighteen (18) years of experience in the health
care field.
Item 2. Properties
The Company's principal executive offices are located at 38 Pond Street,
Franklin, Massachusetts. This office contains approximately 7,500 square feet of
space which the Company currently leases on a five year lease expiring January
1997. In addition, the Company also leases 15 other facilities totaling
approximately 48,400 square feet for its outpatient rehabilitation services.
Item 3. Legal Proceedings
The Company is a party to pending legal proceedings, arising from the normal
business operations of the Company. Management believes these proceedings will
not have a material impact on the financial condition and results of operations
of the Company.
Item 4. Submission of Matters to Vote of Security Holders
No matter was submitted to a vote of the security holders, through solicitation
of proxies or otherwise, during the fourth quarter of the fiscal year covered by
this report.
7
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder matters
(a) Market Information
The Company's common stock is traded in the over-the-counter market. Bid and
asked prices are quoted on the NASDAQ Small-Cap Market under the symbol CHCA.
The high and low prices (based on the bid price) for the common stock, as
reported by the National Association of Securities Dealers, Inc., are indicated
below.
1995 HIGH LOW
---- ---- ---
First Quarter $1.0625 $.6250
Second Quarter .8125 .5000
Third Quarter .5625 .3750
Fourth Quarter .3750 .1875
1994 HIGH LOW
---- ---- ---
First Quarter $1.1875 $.7500
Second Quarter 1.0000 .4375
Third Quarter .7500 .4062
Fourth Quarter 1.5000 .6562
(b) Holders
The approximate number of holders of the Company's common stock as of December
31, 1995 is 600.
(c) Dividends
The Registrant has not paid any cash dividends to date and does not anticipate
or contemplate paying dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
the Company's business. There are no contractual restrictions on dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company was organized and commenced operations in 1984 as a provider of
diagnostic imaging services on a mobile shared-service basis. In July 1991, it
significantly changed its operating business by merging with PTS Rehab, Inc., a
privately-held provider of outpatient rehabilitation services and contract
services to hospitals. Since this merger and its corresponding entry into the
rehabilitative services segment of healthcare, the Company has grown as a
provider of outpatient services through acquisitions. These activities increased
the number of physical therapy clinic locations from nine at the end of 1992 to
fourteen as of March 15, 1996. Consistent with the Company's strategy to build a
network of outpatient rehabilitation facilities, in March 1993 the Company's
Board of Directors approved a plan to discontinue and dispose of its diagnostic
imaging services division. During 1993, the Company acquired nine outpatient
physical therapy clinics. As the Company integrated the 1992 and 1993 acquired
facilities, certain of the facilities were not achieving desired results. The
Company returned one clinic in 1994 to its sellers and closed two clinics in
early 1995.
8
<PAGE>
(a) Liquidity and Capital Resources
The Company's liquidity, as measured by its cash and working capital, decreased
by $127,584 and $209,518 respectively, in 1995 as compared to 1994. The decrease
in cash and working capital during 1995 was due principally to losses caused by
the Company's operations and, to a lesser extent, to capital expenditures of
approximately $138,000. As the Company continued to incur losses throughout
1995, its working capital and available cash declined. In response, the Company
extended the time needed to satisfy its obligations to vendors, resulting in
increased accounts payable. In addition, as discussed below, during 1995 the
Company was unable to make certain scheduled principal and interest payments to
noteholders and was required to negotiate extended payment terms in certain
cases and issue convertible promissory notes in exchange for short-term notes in
other cases. If the Company continues to incur operating losses, the Company's
working capital shortfalls will become even more pronounced and make it
increasingly difficult for the Company to meet scheduled debt repayments. The
Company's losses from operations in each of its four most recent years have
resulted in it having negative net tangible assets at December 31, 1995.
Additionally, the Company is substantially dependent on its factoring
arrangements pursuant to which it has assigned a certain portion of its accounts
receivable to support its operations. The matters described above make it
imperative for the Company to maintain or increase its present factoring
arrangements, to obtain additional financing, to take actions which will result
in the Company being profitable and generating positive cash flow. The Company
continues to pursue additional financing, however, no assurances can be given
that any additional financing may be available, or, if available, that it will
be on terms acceptable to the Company. If the Company is unsuccessful in
achieving the above, this would have a material adverse effect on the Company.
The Company has developed a three pronged strategic plan for achieving future
profitable operations. This plan consists of the following components:
The Company operates 14 physical therapy clinics located throughout the Eastern
United States. The Company intends to integrate operations of its Managed
Rehabilitation Services division with operations at its clinics, producing
greater flexibility with staff assignment, reduced management cost, enhanced
marketing capability and other efficiencies with respect to costs.
The Company's Managed Rehabilitation Services division has continued to
experience significant growth since its formation in September 1994. The Company
believes that this growth will continue. With the integration of physical
therapy clinics operating with the Company's Managed Rehabilitation Services
division, the Company intends to increase sales of its services in the areas
that it currently serves. This will provide the Company the opportunity to seek
contracts with the larger prospective customers for the Company's services in
those marketplaces.
The Company presently holds Certified Rehab Agency Status in several locations.
The Company intends to seek Comprehensive Outpatient Rehabilitation Facility
(CORF) status in those states where it currently operates, which will broaden
the scope of services which the Company may offer and enhance reimbursement
rates for certain of the Company's existing services. In addition, the Company
is exploring the possibility of expanding the scope of its activities to include
the delivery of services off-site, both in-home and at ancillary service
facilities such as schools, nursing homes and assisted living residences.
Net accounts receivable were $2,016,846 at December 31, 1995, compared to
$2,156,165 at December 31, 1994. The net decrease of $139,319 was principally
due to the reduction of receivables from the closing of two clinics in early
1995 offset by an increase in receivables from the contract staffing business.
The number of days average net revenues in net receivables at December 31, 1995
was 93 as compared to 101 at December 31, 1994. Accounts payable increased by
$494,000 in 1995 as compared to 1994, respectively.
9
<PAGE>
Cash used by operations of $25,638 for the 12 months ended December 31, 1995
resulted primarily from an operating loss of approximately $609,000 reduced by
non cash expenses of approximately $251,000, and by a decrease in accounts
receivable of approximately $139,000, and an increase in accounts payable and
accrued expenses of approximately $204,000. Cash provided by operating
activities totaled $298,876 during 1994.
Cash used for investing activities in 1995 consisted of purchases of equipment
of $138,075 and in 1994 consisted of $70,481 to purchase equipment and leasehold
improvements.
Financing activities in 1995 provided funds of $ 36,129. Proceeds from the
issuance of debt were $335,000, issuance of stock provided $125,000, and
payments of $423,871 were made on long-term debt. Due to the shortfalls in
working capital as discussed above, the Company discontinued scheduled principal
and interest payments on several of its note payable obligations during 1995.
The Company has subsequently cured these defaults in principal and interest
payments by renegotiating and extending the payment terms of these obligations,
by issuing new convertible promissory notes and by remitting past-due payments
of principal and interest. As a result, these notes have not been called by the
noteholders.
Financing activities in 1994 used funds of $975,890. Proceeds from debt totalled
$325,000, issuance of preferred stock provided $448,161, and payments of
$1,749,051 were made on long-term debt.
Effective July 20, 1995, Consolidated Rehabilitation Service, Inc., ("CRS"), a
subsidiary of the Company, entered into a factoring agreement with a banking
institution under which CRS may assign its receivables, up to a maximum
aggregate balance of $500,000. Interest is payable at prime plus 2%. As of
December 31, 1995 the Company had received advances of approximately $210,000
under this Agreement
In January 1996, PTS Rehab Inc., a subsidiary of the Company, entered into a
factoring agreement with a lender providing for the advance of up to 85% of
certain of the Company's Accounts Receivable. Interest is payable by the Company
at a rate of the greater of nine percent or two percent over the prime rate. In
addition, the Company is obligated to make other payments to the lender. The
Factoring Agreement expires in June 1997. At April 1, 1996 $65,219 was available
and $760,566 had been advanced under this agreement.
At December 31, 1995, the Company had outstanding approximately $2,200,000 in
notes payable and long-term debt, approximately $521,248 of which is due prior
to December 31, 1996. Of such amount, approximately $1,800,000 is related to
business acquisitions completed prior to 1995. $412,377 of that amount is due
between 2001 and 2003, with interest at a rate of between 7% and 10%.
Substantially all of the Company's assets are security for its outstanding
indebtedness. Interest expense on long-term debt for years ended December 31,
1995 and 1994 was $183,023 and $449,514, respectively.
The Company leases clinic facilities under several non cancelable operating
leases expiring at various times between 1995 and 1999. Rent expense for these
operating leases was $543,600 in 1995 as compared to $695,100 in 1994. During
1996, the Company anticipates that minimum payments under non-cancelable
operating leases will be approximately $542,000.
In December 1994 and January 1995, the Company issued $500,000 of short-term
notes to a limited number of investors, payable in September 1995. In connection
with this financing, the Company issued two-year warrants to purchase 300,000
shares of common stock for $0.75 per share. During August and September 1995,
certain holders of these short-term notes exchanged $375,000 of the outstanding
obligations for 10% convertible promissory notes in the principal amount of
$180,000, payable on September 15, 1998. In conjunction with this transaction,
$195,000 of these notes were converted into 780,000 shares of common stock.
Additionally, the Company repaid $125,000 to a limited number of investors to
satisfy such obligations by selling 500,000 shares of common stock.
In the first quarter of 1995, a holder of a convertible promissory note, issued
in connection with a business acquisition, exchanged approximately $26,000 of
the outstanding obligation for 30,000 shares of the Company's
10
<PAGE>
common stock. Additionally, a promissory note holder forgave approximately
$31,000 of the outstanding balance of a note in exchange for a new convertible
promissory note for $235,000, such amount being the remaining outstanding
balance of the promissory note. Under this convertible note, the outstanding
balance may be converted into shares of common stock at a dollar amount equal to
the greater of $0.75 per share of common stock or 100% of the month-end NASDAQ
Closing Price in the month preceding the date of conversion. No portion of the
outstanding note was converted in 1995.
In February 1996, the Company renegotiated a convertible promissory note and a
promissory note in the aggregate principal amount of $706,230, both of which
were issued in connection with a business acquisition. Under the renegotiated
agreements, the interest rate for these notes was increased to 9.5% and the term
of the notes was extended to 2002. In consideration, the Company issued
three-year warrants to the noteholder to purchase 25,000 shares of the Company's
common stock at $0.30 per share. Additionally, the Company will issue $50,000
worth of the Company's common stock based upon market prices in effect as of the
date of the agreement. This transaction will be accounted for as a restructuring
of debt in 1996.
In January 1996, in satisfaction of prior obligations of like amount, the
Company issued a three-year 12% note payable for $65,750 to a vendor and issued
$65,750 of common stock of the Company based upon the market price of the stock
at the time of issuance.
Stockholders' equity decreased by $267,961 during the twelve months ended
December 31, 1995 primarily as a result of the Company's net loss of
approximately $609,000 offset by an increase in common stock and additional paid
in capital of approximately $341,000. See also "Future Trends, Demands,
Commitments, and Uncertainties" for additional matters relating to liquidity and
future management plans.
Results of Operations
Fiscal Year Ended December 31, 1995 as
Compared to Year Ended December 31, 1994
Discussion of 1995 as Compared to 1994:
Revenues increased 10.5% or $820,823 in 1995 as compared to the year ended
December 31, 1994. Contributing to the revenue increase was an increase during
the period of $ 1,687,000 related to contract staffing revenues generated by
providing staffing and home care services within communities serviced by the
Company's outpatient clinics.
Outpatient physical therapy revenues declined by $866,177 during the year ended
December 31, 1995 as compared to the same period in 1994. Lower 1995 patient
referrals of approximately 9% coupled with the closure of two non performing
clinics during 1995 accounted for this decrease. Management believes that
utilization constraints and fee reductions imposed by managed care and the
insurance industry are significant factors accounting for the decline.
Operating costs were 84.1% of revenues, compared to 84.8% of revenues in 1994,
primarily due to the ability of the Company to maintain costs on a revenue basis
as well as the closure of two non-performing clinics.
Administrative and selling costs measured as a percent of revenue represented
approximately 19% of revenue during each of 1995 and 1994. During the second
half of 1994 the Company instituted a substantial cost control program intended
to reduce administrative and selling costs.
Depreciation and amortization expenses decreased by $110,884 during the year
ended December 31, 1995 compared to 1994. Amortization of goodwill associated
with the acquisitions of physical therapy clinics prior to 1994 accounted for a
substantial portion of such amounts. During the fourth quarter of 1994, the
Company wrote off goodwill of approximately $3.2 million, thereby reducing post
1994 amortization expense by approximately $35,000 each quarter
11
<PAGE>
(see discussion below). When adverse events or changes in circumstances indicate
that previously anticipated cash flows warrant reassessment, the Company reviews
the recoverability of goodwill by comparing estimated undiscounted future cash
flows from clinical activities to the carrying value of goodwill. Based upon the
Company's 1995 review of recoverability, it was determined that no impairment
existed.
During the second quarter of 1994, the Company closed one of its clinics
acquired in 1993. The Company had previously expensed the goodwill of $255,000
related to this acquisition by a charge against 1993 earnings. Based upon the
settlement reached with the seller of the clinic, certain assets of the clinic
were retained by the seller and the note obligation by the Company of $224,000
was rescinded. The transaction resulted in a recovery of $153,188 of the
goodwill previously expensed.
Interest expense declined by $266,491 during the year ended December 31, 1995 as
compared to 1994. Average debt outstanding during 1995 as compared to 1994 was
significantly lower due to the conversion of approximately $4,555,572 of debt on
June 30, 1994 into common and preferred stock of the Company.
The Company's tax provision for each of the periods is substantially the result
of state income taxes.
The Company had a net loss of $608,855 for the year ended December 31, 1995 as
compared to $4,581,929 for 1994.
During the first six months of 1995, the Company incurred significant expenses,
principally legal fees related to a potential acquisition that did not
materialize. The cost attributed to this one time occurance was in excess of
$200,000.
At the end of the second quarter of 1994, the Company recorded a contract
settlement cost of $300,000. The settlement principally entailed the costs of
employee separation and related costs.
Fiscal Year ended December 31, 1994 as
Compared to Year Ended December 31, 1993
Discussion of 1994 as Compared to 1993:
Revenues increased 3.2% or $243,306 in 1994 as compared to 1993. This increase
was due to increases in revenue during 1994 of $1,041,794 from 1993 acquired
businesses offset by declines of $1,158,488 or 15.3% for the clinics in
operation for both periods. Adverse weather conditions in the first quarter of
1994 accounted for approximately $400,000 of the decline with the balance
largely attributable to fewer patient visits on average for each new patient,
reflecting increased managed care constraints on utilization. Revenues reported
are net of allowances for contractual and other adjustments. Allowances of
$3,623,065 and $2,683,951 were recorded in 1994 and 1993, respectively,
representing 31.7% of 1994 gross revenue and 26.2% of 1993 gross revenue. The
increase in allowances as a percentage of gross revenue was principally due to a
higher percentage of gross revenues attributable to HMO and other managed care
payors in 1994 as compared to 1993.
Operating costs were 84.8% of revenues, compared to 73% of revenues in 1993. A
significant portion of costs (principally personnel and facility rent) are
largely fixed costs and are therefore more sensitive to volume changes. Lower
patient volume due to weather conditions and reduced average number of visits
for each new patient caused personnel costs and, to a lesser extent, facility
rent to represent a higher percentage relative to revenue in 1994 as compared to
1993.
Administrative and selling costs increased by $186,235 or 14.3% in 1994 as
compared to 1993. Based upon the average number of clinics in operation during
1994 as compared to 1993, administrative and selling costs decreased from
$91,379 per clinic in 1993 to $86,284 in 1994.
12
<PAGE>
During the period from 1991 to 1993, the Company made a series of acquisitions
of physical therapy clinics in Massachusetts, Pennsylvania, Delaware and
Florida. Goodwill recorded by the Company in conjunction with those acquisition
totalled approximately $6.9 million. This goodwill was being amortized over a
period ranging from 27 to 40 years.
Since these acquisitions, the Company has experienced lower than anticipated
patient volumes at certain of the clinics primarily as a result of utilization
constraints imposed by managed care and third party payors as well as new
competition. These adverse events caused the Company, during the fourth quarter
of 1994, to revise its projections of operating performance for all purchased
clinics. The revised cash flow projections indicated that the unamortized
goodwill associated with certain clinics would not be recovered in the remaining
amortization periods for those clinics. Accordingly, the Company wrote off
goodwill in the amount of $3,209,439 in the fourth quarter. The majority of the
clinics to which this impairment charge relates were acquired in 1993. Although
patient volumes and, therefore, revenues at these clinics during the first
several months of 1994 were lower than anticipated when they were acquired, such
shortfalls were initially attributed to adverse weather conditions and other
nonrecurring factors and, therefore, were considered to be a temporary
phenomenon. In the fourth quarter of 1994 it was determined that there were also
factors of a more permanent nature, related primarily to managed health care and
competition, to which a portion of these shortfalls at these clinics could be
attributed. These projections represent management's best estimate of future
performance, although there can be no assurances that such estimates will be
indicative of future results, which ultimately may be less than, or greater
than, these estimates. The Company reached a settlement with respect to a
previously closed clinic which resulted in recovery of $153,000. This amount has
been netted against the above goodwill charge.
Interest expense declined in 1994 by $86,014 to $449,514 as compared to 1993. A
significant factor in reducing interest expense was the conversion on June 30,
1994 of $4,555,572 of debt into the Company's common and preferred stock.
The Company entered into a termination agreement with its former Chairman of the
Board and Chief Executive Officer. The settlement of all contractual obligation
between the Company and the executive resulted in a charge against earnings of
$325,000.
The 1994 provision for income taxes of $13,000 is related to minimum state
corporation taxes.
(c) Future Trends, Demands, Commitments, and Uncertainties
The Company's principal business is providing rehabilitative services.
Demographic trends and new medical technologies are expected to cause continued
growth for this section of the healthcare marketplace. Continued national trends
to contain healthcare costs are expected to place limitations on high technology
testing and curtailed utilization of medical specialists, resulting in increase
utilization of rehabilitive services. Each of these trends are expected to be
favorable to the Company by increasing the need for outpatient rehabilitative
services. The Company intends to participate in the growth of rehabilitation
services through internal expansion of its business and further development of
ancillary contract rehabilitation services.
13
<PAGE>
Item 7. Financial Statements
Audited financial statements for each of the two fiscal years ended
December 31, 1995 and 1994 are included as part of this report on pages
23-40.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There are not, and have not been, any disagreements between the Company and
its accountants on any matter of accounting principles or practices or
financial statement disclosure.
14
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
with Section 16(a) of the Exchange Act
Name Age Position
---- --- --------
Joel Friedman 55 Chairman of the Board, Chief
Executive Officer and Director
Alan Mantell 49 Chief Operating Officer
Robert M. Whitty 40 President
Christopher T. Harkins 47 Director
James Kenney 53 Director
Paul W. Frankel, M.D., Ph. D. 47 Director
Goodhue W. Smith, III 46 Director
Sidney Dworkin 74 Director
Joel Friedman, became a director of the Company in December 1991 and Chairman
and Chief Executive Officer in July 1994. Mr. Friedman, a graduate of Columbia
College, has been involved for the past twenty five years in the financing and
management of several public and private companies and real estate ventures,
most recently, and for at least the past five years through Friedman
Enterprises, Inc. Mr. Friedman is also a member of the Board of Directors of 3D
Geophiscal, Inc.
Alan Mantell, was elected Chief Operating Officer in November 1995. Since 1979,
Mr. Mantell has shared responsibilities with Mr. Friedman as an officer,
director and shareholder of Founders. From 1980 through 1987, Mr. Mantell was
the sole stockholder of Stuyvesant Capital Corporation, an N.A.S.D. member firm.
In 1992 he formed Guardian Capital Group, Ltd., an early participant in the
commercial mortgage-backed securities markets which operated one of the first
multi-family mortgage conduits in the U.S.
Robert M. Whitty, was elected President in November 1995. Mr. Whitty has been a
vice president of the Company since 1994, and prior thereto, Mr. Whitty provided
consulting services for various health care companies, which services included
financial planning, strategic planning, acquisitions and business development.
Mr. Whitty has over eighteen (18) years of experience in the health care field.
Christopher T. Harkins, joined Consolidated Health Care Associates, Inc. in June
1990 and became President on December 20, 1990. He was the Chief Executive
Officer of Sports Therapy Centers, Ltd., an operator of sports medicine physical
therapy clinics, from 1988 to 1990. From 1986 to 1988, he was Vice President and
Treasurer of the Beacon Group, Inc., a privately owned contractor located in
Bloomfield, Connecticut. Prior to 1986, Mr. Harkins had over ten years of
experience in public accounting.
15
<PAGE>
James Kenney became a director in March 1993. Mr. Kenney is currently an
Executive Vice President of San Jacinto Securities in Dallas, TX. From February
1992 until June 1993, he had been a partner of Renaissance Capital Group, Inc.,
a Dallas money management firm. From 1989 to February 1992, Mr. Kenney was
Senior Vice President of Capital Institutional Services, Inc., a brokerage firm
located in Dallas, Texas that provided third-party financial and business
research. From 1987 to 1989, Mr. Kenney was employed as a senior vice president
and registered representative at the Dallas office of Rauscher Pierce Refsnes,
Inc., a securities brokerage firm. Mr. Kenney is also a director of Amerishop
Corp., Coded Communications Corp., Industrial Holdings, Inc., Prism Group, Inc.,
Scientific Measurement Systems, Inc., Appoint Technologies, Inc., Technol
Medical Products, and Tricom, Inc.
Paul W. Frankel, M.D., Ph. D., has been a member of the Board of Directors since
July 1994. Dr. Frankel is currently, and since August 1993 has been the
President of Life Extension Institute, Inc., a New York company specializing in
preventive health services. From April 1992 to August 1993, Dr. Frankel was a
Partner and the National Medical Director of Coopers & Lybrand. For the period
May 1988 to February 1992, Dr. Frankel served in various positions for
Metropolitan Life Insurance Company, ultimately serving as its Vice President
and the National Medical Director.
Goodhue W. Smith, III has been a member of the Board of Directors since July
1994. In 1978, Mr. Smith founded Duncan-Smith Co., an investment banking firm in
San Antonio, Texas and currently serves as its Secretary and Treasurer. Mr.
Smith is also a Director of Citizens National Bank of Milam County, and Ray
Ellison Mortgage Acceptance Co..
Sidney Dworkin, was elected to the Board of Directors in March 1996. Dr. Dworkin
was a founder, former President, Chief Executive Officer and Chairman of Revco,
Inc. Between 1987 and the present, Dr. Dworkin has also served as Chief
Executive Officer of Stonegate Trading, Inc., an importer and exporter of
various health, beauty aids, groceries and sundries. Between 1988 and the
present, Dr Dworkin has served as Chairman of the Board of Advanced Modular
Systems, which is engaged in the sale of modular buildings. Between June 1993
and the present Dr. Dworkin has also served as Chairman of Global International,
Inc., which is involved in the sale and leasing of modular buildings to
hospitals and Chairman of the Board of Comtrex Systems, which is engaged in the
provision of data processing services. In addition, between July 1988 and the
present, Dr. Dworkin has served as Chairman of the Board of General Computer
Corp., which is engaged in the marketing of date processing equipment. Dr
Dworkin also serves on the Board of Directors of CCA Industries, Inc.,
Interactive Technologies, Inc. and Northern Technologies International
Corporation, all of which are publicly-traded companies.
Renaissance Capital Partners II Ltd. ("Renaissance") is entitled to designate
two directors for nomination to the Company's Board of Directors. Messrs. Kenney
and Smith are designees of Renaissance.
In 1995, the Board of Directors held five regularly scheduled and special
meetings. All directors attended at least seventy-five percent (75%) of the
total number of meetings of the Board of Directors and the committees on which
they served. The Audit Committee (comprised during 1995 of Messrs. Achilarre and
Smith) met once during the Company's last fiscal year. This Committee recommends
to the Board of Directors a firm of independent public accountants to audit the
books and accounts of the Company. The Committee reviews the reports prepared by
the independent public accountants and recommends to the Board any actions
deemed appropriate in connection with the reports. The Compensation Committee
was comprised of Messrs. Kenney and Frankel during 1995. The Board of Directors
has no standing nominating committee, or other committee performing similar
functions. However, the Board of Directors, meeting as a whole, constitutes a
committee for the issuance of options and other awards under the Company's Stock
Incentive plan. The non-employee directors were entitled to receive directors
fees in the amount of $500 per meeting throughout 1995.
16
<PAGE>
Item 10. Executive Compensation
The following summary compensation table sets forth, for the three fiscal years
ended December 31, 1995, the cash compensation of each of the executive officers
of the Company whose total salary and bonuses exceeded $100,000.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Name and Other
Principal Position Annual Restricted All other
Year Salary Bonus Compen- Stock Options/ LTIP Compen-
sation Awards SARs Payouts sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joel Friedman 1995 $ 75,000 0 0 0 0 0 0
Chairman of the Board 1994 0 0 0 0 1,250,000 0 0
and Chief Executive 1993 0 0 0 0 0 0 0
Officer (1)
Arnold Benson
Chairman of the Board 1995 0 0 0 0 0 0 0
and Chief Executive 1994 $194,670 0 0 0 400,000 0 175,000
Officer (1) 1993 $225,000 0 0 0 0 0 0
Christopher Harkins 1995 $135,000 0 0 0 0 0 0
President 1994 $136,750 0 0 0 250,000 0 0
1993 $112,823 0 0 20,000 (2) 0 0 0
Robert M. Whitty 1995 $106,000 (3) 0 0 0 0 0 0
President
</TABLE>
(1) Mr. Benson served as Chairman of the Board and Chief Executive Officer from
July 1991 through July 1994. Joel Friedman was elected Chairman of the
Board and Chief Executive Officer in July 1994. Mr. Friedman, who has been
a director since 1991, has received no compensation from the Company during
1994 other than the ordinary payments of $500 per meeting for non-employee
directors. Mr. Friedman, commencing January 1, 1995, is compensated at the
rate of $75,000 per year.
(2) Represents issuance of stock bonus to Mr. Harkins.
(3) Mr. Whitty was elected President of the Company in November 1995.
The aggregate amount of any miscellaneous compensation not set forth in the
table or the description of benefit plans, including any personal benefits
valued at their incremental cost to the Company, received by any executive
officers included in the above table did not exceed 10% of such person's cash
compensation.
Employment Agreements
In March 1993, the Company entered into a three-year employment agreement with
Christopher Harkins to serve as President of the Company. Under this agreement,
Mr. Harkins was entitled to receive $135,000 per year for the term of the
Agreement. In November 1995, the Company elected to terminate Mr. Harkins
employment. Subsequently, in a Arbitration proceeding between the Company and
Mr. Harkins, Mr. Harkins was awarded severance pay at the contract rate for the
duration of the three year term of his original contract.
17
<PAGE>
Joel Friedman, the Company's Chairman and Chief Executive Officer is currently
compensated at the rate of $75,000 per year. Mr. Friedman provides his services
to the Company, as needed, on a part-time basis and will receive additional
compensation determined by the compensation committee of the Board of Directors.
1989 Stock Incentive Plan
Under its 1989 Stock Incentive Plan (the "Plan"), the Company grants Awards of
Common Stock to those persons determined by the Board of Directors to be key
employees who are responsible for the management and growth of the Company. The
size of the Award is generally determined on the basis of the level of
responsibility. Types of Awards include non-statutory stock options, incentive
options (qualifying under Section 422A of the Internal Revenue Code of 1986),
restricted stock awards and stock appreciation rights (SARs). Options and stock
appreciation rights generally expire ten years from the grant date and unless
otherwise provided, are exercisable on a cumulative basis with respect to 20% of
the optioned shares on each of the five anniversaries after the grant date.
Restrictions on restricted stock awards generally lapse with respect to 20% of
the shares subject to the award after the expiration of each year following the
grant date and the portions of such awards for which restrictions have not
lapsed are subject to forfeiture upon termination of employment. The Company may
grant options to purchase an aggregate of 500,000 shares of Common Stock under
the Plan, 380,000 of which are currently available for grant. No stock options
or other awards under the Plan were granted during 1995, nor were any options
exercised by the individuals named in the Summary Compensation Table during
1995.
1994 Stock Option Plan
The Company adopted, effective November 3, 1994 and approved by the stockholders
of the Company June 20, 1995, a 1994 Stock Option Plan (the 1994 Plan). The
terms and conditions of the 1994 Plan are similar to the 1989 Plan, except that
the 1994 Plan does not provide for grant of SAR's. The Company may grant options
to purchase an aggregate of 3,000,000 shares of Common Stock under the Plan, of
which 1,800,000 were granted in 1994 and 1,759,667 of which are currently
available for grant. However, in January 1996, the Company granted options to
acquire 37,667 shares, 37,667 shares, and 31,666 shares of Common Stock for $.28
per share to Joel Friedman, Alan Mantell, and Robert M.
Whitty respectively.
The following table sets forth information concerning any exercise of stock
options during the Company's fiscal year ended December 31, 1995 by the Named
Executives, the number and value of options owned by the named individuals and
the value of any in-the-money unexercised stock options as of December 31, 1995:
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held at In-the-money Options at
December 31, 1995 (1) December 31, 1995 (2)
Shares acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel Friedman 0 0 666,625 416,667 0 0
Christopher T. Harkins 0 0 0 0 0 0
Robert M. Whitty 0 0 0 0 0 0
</TABLE>
(1) Does not include options granted in 1996.
(2) Based on the average Bid and Ask price on NASDAQ of the Company's common
stock on that date ($.31).
18
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners & Management
The following table sets forth information at March 15, 1996, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, and (iii) all executive officers and directors as a
group. Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
Name & Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
- ----------------- -------------------- -----
Healthcare Partners, Inc. 757,669 (1) 5.22%
31 Old Orchard Circle
Boylston, MA 01505
Joel Friedman 835,529 (2) 5.65%
Christopher Harkins 142,208 1.01%
James Kenney 60,000 (3) *
Paul Frankel 60,000 (4) *
Goodhue W. Smith, III 15,000 (4) *
Alan M. Mantell 0 *
Robert M. Whitty 0 *
Sidney Dworkin 246,951 (5) 1.73%
Renaissance Capital 9,098,217 (6) 49.98%
Partners II, Ltd.
8080 N. Central Exwy.
Suite 210-LB 59
Dallas, TX 75206
All executive officers and 1,359,688 (7) 8.88%
directors as a group (8 persons)
- ---------------
*less than 1%
The Company is not aware of any contractual arrangements which may at a
subsequent date result in a change of control of the Company.
(1) Includes 357,669 shares held of record, and 400,000 shares underlying
options that the Company granted to Healthcare Partners, Inc.. See Certain
Relationships and Transactions.
(2) Includes 666,625 shares subject to currently exercisable non-qualified
stock options and the right to acquire 27,475 shares upon conversion of
Series A Preferred Stock.
(3) Includes 60,000 shares subject to currently exercisable non-qualified stock
options.
(4) Includes 10,000 shares subject to currently exercisable non-qualified stock
options.
(5) Includes 106,667 shares issuable upon conversion of convertible promissory
notes. Also includes 53,333 shares beneficially owned by a partnership
which Dr. Dworkin is a partner.
(6) Includes 5,000,000 shares and the right to acquire 4,098,217 shares
issuable upon conversion of outstanding Series A Preferred Stock and Series
B Preferred Stock.
(7) Includes 746,625 shares subject to currently exercisable non-qualified
stock options, the right to acquire 27,475 shares upon conversion of
outstanding Series A Preferred Stock, 50,000 shares subject to Common Stock
purchase warrants, and 160,000 shares issuable upon the conversion of
convertible notes.
19
<PAGE>
Item 12. Certain Relationships and Related Transactions
Effective June 30, 1994, certain holders of the Company's convertible debt,
converted their notes into Common Stock of the Company and into a newly issued
Series A Preferred Stock. Directors and affiliates of the Company who
participated in the conversion were as follows:
Renaissance Capital Partners, II, Ltd. ("Renaissance"): Convertible debt and
accrued interest of $3,695,984 was converted into 5,000,000 shares of Common
Stock and 1,195,984 shares of Series A Preferred Stock. The Series A Preferred
Stock may be converted into 2,098,217 shares of Common Stock of the Company.
Joel Friedman: Convertible debt and accrued interest of $51,375 was converted
into 71,429 shares of Common Stock and 15,661 shares of Series A Preferred
Stock. The Series A Preferred Stock may be converted into 27,475 shares of
Common Stock of the Company.
Christopher Harkins: Convertible debt and accrued interest of $25,688 was
converted into 51,375 shares of Common Stock of the Company.
Diedre Benson: Convertible debt and accrued interest of $555,722 was converted
into 1,111,444 shares of Common Stock of the Company. The Company has been
informed that Diedre Benson is the sole stockholder of Healthcare Partners,
Inc., a principal stockholder of the Company.
On September 8, 1994, effective November 11, 1994, the Company entered into a
Termination Agreement with Arnold E. Benson ("the Termination Agreement"), the
former Chairman of the Board and Chief Executive Officer of the Company. In
November 1994, Mr. Benson and his wife Diedre Benson sold in a private placement
an aggregate of 2,500,000 shares of Common Stock beneficially owned by he and
his wife Diedre Benson for an aggregate of $1,075,000, Mr. Benson received a
payment from the Company of $175,000 as severance in consideration of the
termination of his Employment Agreement.
The Company has also granted to Healthcare Partners, Inc., a designee of Mr.
Benson, on the Effective Date of the Termination Agreement, an option to
purchase up to an aggregate of 400,000 shares of Common Stock for $.50 per share
for a period of three years. The Company has also agreed to provide Mr. Benson
with other benefits, including the payment of health insurance and disability
insurance costs and certain expenses in connection with the negotiation of the
Termination Agreement. Mr. Benson and Mrs. Benson have entered into a
non-competition agreement with the Company with respect to certain activities
effective for a period of two years from the effective date of the agreement.
Mr. Benson resigned from the Board of Directors of the Company on November 11,
1994.
On September 8, 1994, Renaissance loaned the Company $100,000 pursuant to a
Convertible Promissory Note, convertible at the option of Renaissance at $.33
per share of Common Stock. On October 24, 1994, the Company exchanged the
Convertible Promissory Note for 100,000 shares of Series B Preferred Stock.
Additionally, Renaissance invested $400,000 to acquire 400,000 shares of Series
B Preferred Stock. The Series B Preferred Stock may be converted at any time, at
the option of the holder thereof at $.25 per share of Common Stock. James
Kenney, a Director of the Company was, until June 1993 a general partner of
Renaissance. Renaissance has the right to designate two members for nomination
to the Board of Directors of the Company. Mr. Kenney and Goodhue W. Smith, III
are currently the designees of Renaissance to the Board.
20
<PAGE>
Under the terms of the Series A Preferred Stock and the Series B Preferred
Stock, the Company has agreed that it will not issue in excess 1,500,000
additional shares of Common Stock of the Company in any single transaction or
related series of transactions without the consent of the majority holders of
the Series A Preferred Stock and the Series B Preferred Stock, together.
Renaissance owns a substantial majority of the Series A Preferred Stock and is
the sole holder of the outstanding shares of Series B preferred stock of the
Company.
In January 1995, Sidney Dworkin, Ph.D., a director of the Company loaned the
Company $100,000 pursuant to a convertible promissory note and received warrants
to purchase 50,000 shares of Common Stock for $.75 per share. In August 1995,
Mr. Dworkin converted the note into 106,667 shares of Common Stock. In addition,
a partnership in which Mr. Dworkin is a partner loaned the Company $50,000 under
the same terms and received a warrant to purchase 25,000 shares of Common Stock
for $.75 per share. In August 1995, the note was converted into 53,333 shares of
Common Stock.
In November 1995, Joel Friedman, the Chairman and Chief Executive of the Company
and Robert M. Whitty, the President of the Company, jointly and severally
guaranteed the validity of the Company's accounts receivable that were pledged
to Capital Factors, Inc., a lender of the Company. The amount of the line of
credit secured by the Company's accounts receivables is $500,000.
Compliance With Section 16(a) of the
Securities Exchange Act of 1934
Section 16 (a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC"), initial reports of ownership and reports of
changes in ownership of Common Stock of the Company. Officers, directors and
ten-percent stockholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the fiscal year ended December 31, 1995, none
of the officers, directors and tenpercent beneficial owners of the Company
failed to file timely any such reports under Section 16(a) of the Securities
Exchange Act of 1934.
21
<PAGE>
PART IV
Item. 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Independent Auditors' Report and Audited Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1994,
Consolidated Statements of Operations, Stockholders' Equity and Cash
Flows for the years then ended December 31, 1995 and 1994.
2. Exhibits.
3.1 Articles of Incorporation.*
3.2 By-Laws.
3.3 Certificate of Designation.*
10.1 Employment Agreement between the Company and Christopher Harkins,
dated June 3, 1993.*
10.2 Termination Agreement between the Company and Arnold Benson, dated
September 8, 1994.*
10.3 1989 Stock Option Plan.*
10.4 1994 Stock Option Plan.*
10.5 Healthcare Factoring Agreement between the Company and Capital
Healthcare Financing, dated January 15, 1996.
21.1 Subsidiaries of the Registrant.
*Exhibit 3.1 was filed with the commission as part of the annual
report on Form 10-K, which was filed March 29, 1989, and is
incorporated herein by reference. The remaining exhibits are
incorporated by reference to the exhibit filed under the same number
in the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
(b) Reports on Form 8-K.
Not applicable.
22
<PAGE>
Financial Statements and Schedules
Table of Contents
Consolidated Health Care Associates, Inc.
Page
----
Independent Auditors' Report 24
Consolidated statements and notes as of December 31, 1995,
and 1994 and for the years then ended:
Consolidated Balance Sheets 25
Consolidated Statements of Operations 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29-40
23
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Consolidated Health Care Associates, Inc.
In our opinion, the accompanying consolidated financial statements appearing on
pages 25 through 40 present fairly, in all material respects, the financial
position of Consolidated Health Care Associate, Inc. and its subsidiaries at
December 31, 1995 and 1994 and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 15 to the
financial statements, the Company's ability to meet all its obligations as they
become due is dependent on the continued availability of financing arrangements
for factoring receivables and on the availability of other sources of financing.
These financing uncertainties raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in this regard are
described in Note 15. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Providence, RI
April 5, 1996
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
====================================================================================================================================
Consolidated Balance Sheets as of December 31, 1995 and 1994
====================================================================================================================================
ASSETS: 1995 1994
- ------- ----------- -----------
<S> <C> <C>
Current assets:
Cash $ 85,557 $ 213,141
Accounts receivable (net of allowance of $815,000 in 1995 and $995,000 in
1994) 2,016,846 2,156,165
Other current assets 218,316 66,673
----------- -----------
Total current assets 2,320,719 2,435,979
----------- -----------
Property and equipment, at cost:
Equipment 1,292,487 1,156,912
Less accumulated depreciation and amortization (694,903) (538,903)
----------- -----------
Property and equipment, net 597,584 618,009
----------- -----------
Other assets:
Goodwill (net of accumulated amortization of $309,290 in 1995 and $235,175
in 1994) 2,503,515 2,577,630
Other 144,979 237,996
----------- -----------
Total other assets 2,648,494 2,815,626
----------- -----------
TOTAL $ 5,566,797 $ 5,869,614
=========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Short-term debt and current portion of long-term debt $ 521,248 $ 620,941
Accounts payable 799,888 305,740
Accrued personnel costs 326,468 370,129
Accrued expenses and other liabilities 214,583 471,119
----------- -----------
Total current liabilities 1,862,187 1,767,929
Long-term debt 1,699,360 1,839,716
Other liabilities 26,998 15,756
----------- -----------
Total liabilities 3,588,545 3,623,401
----------- -----------
Commitments and contingencies (Notes 6 and 10)
Stockholders' equity:
Common stock, $.012 par value, 50,000,000 shares authorized: issued
14,702,306 in 1995, and 13,272,306 in 1994 176,428 159,268
Preferred stock, 10,000,000 shares authorized; issued 1,727,305 in 1995 and
1994 1,727,305 1,727,305
Additional paid-in capital 7,661,116 7,337,382
Accumulated deficit (7,499,097) (6,890,242)
----------- -----------
2,065,752 2,333,713
Less-treasury stock, 700,000 shares, at cost (87,500) (87,500)
----------- -----------
Total stockholders' equity 1,978,252 2,246,213
----------- -----------
TOTAL $ 5,566,797 $ 5,869,614
=========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
====================================================================================================================================
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
====================================================================================================================================
Consolidated Statements of Operations
For the Years Ended December 31, 1995 and 1994
====================================================================================================================================
1995 1994
------------ ------------
<S> <C> <C>
Revenue, net (Note 4) $8,617,798 $7,796,975
------------ ------------
Costs and expenses:
Operating costs 7,244,196 6,613,211
Administrative and selling costs 1,641,099 1,488,384
Depreciation and amortization 230,115 340,999
Write-off of acquisition goodwill (Notes 1 and 3) -- 3,056,439
Contract settlement -- 325,000
------------ ------------
Total operating costs 9,115,410 11,824,033
------------ ------------
Operating loss (497,612) (4,027,058)
------------ ------------
Interest expense, net (183,023) (449,514)
Other income, net 81,780 --
------------ ------------
(101,243) (449,514)
------------ ------------
Loss before income taxes and discontinued operations (598,855) (4,476,572)
Income tax provision 10,000 13,000
------------ ------------
Net loss from continuing operations (608,855) (4,489,572)
Discontinued operations (Note 2):
Loss from operations of discontinued diagnostic
imaging services division -- (92,357)
------------ ------------
Net loss ($608,855) ($4,581,929)
============ ============
Net loss per share:
Continuing operations ($.05) ($.52)
Discontinued operations -- (.01)
------------ ------------
Net loss per share ($.05) ($.53)
============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
====================================================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
====================================================================================================================================
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1995 and 1994
====================================================================================================================================
Additional
Common Preferred Treasury Paid-In Accumulated
Stock Stock Stock Capital Deficit
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 73,715 ($87,500) $4,247,103 ($2,308,313)
Common stock issued 85,553 3,090,279
Preferred stock issued $1,727,305
Net loss for the year (4,581,929)
-------- ---------- -------- ---------- -----------
Balance, December 31, 1994 159,268 1,727,305 (87,500) 7,337,382 (6,890,242)
Common stock issued 17,160 323,734
Net loss for the year (608,855)
Balance, December 31, 1995 $176,428 $1,727,305 ($87,500) $7,661,116 ($7,499,097)
======== ========== ======== ========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
====================================================================================================================================
27
<PAGE>
====================================================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
====================================================================================================================================
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995 and 1994
====================================================================================================================================
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating A
ctivities:
($ 608,855) ($4,581,929)
Net loss
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation 156,000 296,948
Amortization of goodwill 74,115 197,051
Loss on disposal of fixed assets 2,500 --
Write-off of goodwill -- 3,056,439
Noncash interest expense 18,277 234,939
Gain on debt restructuring (31,372) --
Non-cash charge for 401K contribution 79,500 35,660
Decrease in accounts receivable 139,319 973,810
(Increase) decrease in other current assets (151,643) 57,819
Decrease in other assets 93,017 14,641
Increase in accounts payable, accrued personnel
costs, accrued expenses, and other liabilities 203,504 13,498
----------- -----------
Net cash (used for) provided by operating activities (25,638) 298,876
----------- -----------
Cash Flows From Investing Activities:
Purchases of equipment (138,075) (70,481)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of debt 335,000 325,000
Proceeds from issuance of common stock 125,000 --
Proceeds from issuance of preferred stock -- 448,161
Principal payments on debt (423,871) (1,749,051)
----------- -----------
Net cash provided (used for) by financing activities 36,129 (975,890)
----------- -----------
Net decrease in cash (127,584) (747,495)
Cash, beginning of year 213,141 960,636
----------- -----------
Cash, end of year $ 85,557 $ 213,141
=========== ===========
See note 5 for information regarding non-cash transactions
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
====================================================================================================================================
</TABLE>
28
<PAGE>
Consolidated Health Care Associates, Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
1. Summary of significant accounting policies
Consolidated Health Care Associates, Inc. (the Company or CHCA) is a provider of
therapeutic rehabilitation services including physical, occupational and speech
therapy. Services are provided on a local and regional basis through a network
of outpatient clinics, as well as through managed rehabilitation contracts.
The following is a summary of significant accounting policies followed by the
Company in the preparation of the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Consolidated Imaging Systems, Inc., Associated
Billing Corporation, PTS Rehab Inc. and Consolidated Rehabilitation Services,
Inc. All significant intercompany transactions and balances have been
eliminated.
Revenues and Accounts Receivable
Revenues are recorded when services are provided at the estimated net realizable
amounts from patients, third party payers and contracted agreements.
Substantially all of the Company's accounts receivable are due from third-party
insurance companies or government agencies. During 1995, the Company began
factoring with recourse all of the accounts receivable of Consolidated
Rehabilitation Services, Inc. At December 31, 1995, the Company was contingently
liable for approximately $327,000 of such accounts. A reserve of approximately
$16,000 is included in the $815,000 allowance for doubtful accounts in the
accompanying consolidated balance sheet at December 31, 1995, to provide for the
estimated uncollectible portion of accounts receivable with recourse. Service
fees charged by the factoring agent during 1995 totalled $18,722, and are
included as interest expense on the accompanying consolidated statement of
operations.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is determined utilizing
the straight-line method over the estimated useful lives of equipment, furniture
and fixtures as follows:
Equipment 3 - 10 years
Furniture and fixtures 5 - 10 years
When property or equipment is retired or otherwise disposed of, the cost and
related accumulated depreciation is removed from the accounts with any resulting
gain or loss reflected in net income. Maintenance and repairs are expensed as
incurred.
Goodwill
The excess of the purchase price over the fair value of the net assets of
acquired physical therapy clinics has been recorded as goodwill and is being
amortized over 27-40 years using the straight-line method. Management believes
this amortization period is reasonable for its clinics with profitable
operations. When adverse events or changes in circumstances indicate that
previously anticipated cash flows warrant reassessment, the Company reviews the
recoverability of goodwill by comparing estimated undiscounted future cash flows
from clinical
29
<PAGE>
activities to the carrying value of goodwill. If such cash flows are less than
the carrying value of the goodwill, an impairment loss is measured as the amount
by which goodwill exceeds the present value of estimated cash flows using a
discount rate commensurate with the risks involved (Note 3).
Income Taxes
Income taxes are provided utilizing the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those differences are expected
to be recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the period reported. Actual results could differ from those
estimates. Estimates are used when accounting for allowance for doubtful
accounts, depreciation and amortization, employee benefit plans, taxes, deferred
taxes and contingencies.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, accrued
personnel costs, other accrued expenses, and other liabilities are reasonable
estimates of their fair value because of the short maturity of those
instruments. It is not practical for the Company to estimate the fair value of
long-term debt without the Company incurring excessive costs.
New Accounting Pronouncements
The Financial Accounting Standards Board (the FASB) issued Financial Accounting
Standard No.121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of, "(FAS 121) in March 1995. FAS 121 requires that long-lived assets
and certain indefinite intangible assets be reviewed for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The entity must estimate the future cash flows expected to
result from the use of the asset and its eventual disposition, and to recognize
an impairment loss for any differences between the fair value of the asset and
the carrying amount of the asset. FAS 121 will be adopted in 1996. The effect on
the Company's financial position or results of operations from adoption of FAS
121 is not expected to be material.
The FASB issued Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", (FASB 123) in October 1995 effective for years
beginning after December 15, 1995. Under provisions of FAS 123, the Company is
not required to change its method of accounting for stock-based compensation.
Management expects to retain its current method of accounting.
30
<PAGE>
Reclassifications
Certain 1994 amounts have been reclassified to agree with the 1995 presentation.
2. Discontinued Operations
During 1993, the Company's Board of Directors approved a divestiture and
restructuring program (the Divestiture Program) pursuant to which the Company's
diagnostic imaging services to hospitals were discontinued. Remaining assets
associated with this discontinued operation were sold effective September 30,
1994. Financial results of these operations have been classified in the
Consolidated Statements of Operations as discontinued operations; revenue and
income have been excluded from continuing operations.
Summary results of operations, which have been classified as discontinued
operations, are as follows:
================================================================================
1995 1994
================================================================================
Revenue $ -- $743,285
Loss before income taxes -- (92,357)
Net loss -- (92,357)
================================================================================
3. Goodwill
Goodwill was recorded during the period from 1991 through 1993 in conjunction
with the Company's acquisitions of physical therapy clinics in Massachusetts,
Pennsylvania, Delaware and Florida during that period. Since these acquisitions,
the Company has experienced lower than anticipated patient volumes at certain
clinics which it attributes to utilization constraints imposed by managed care
and third party payers and the impact of new competitors in these geographic
markets. Revenues at these facilities have also declined from management's
original expectations at the time of the acquisitions because of the
unanticipated increase in customers covered by managed care. Revenues have also
been adversely affected by reductions in workers compensation and personal
injury reimbursement rates.
These trends, which are expected to continue in the foreseeable future, have
adversely impacted the Company's profitability in its Pennsylvania, Delaware and
Florida clinics. As a consequence, during the fourth quarter of 1994, the
Company revised its original projections developed at the time of acquisition to
more accurately reflect the effects of these trends. The resulting cash flow
projections indicated that the Company would not recover the goodwill
attributable to certain of its clinics. Accordingly, the Company recorded an
impairment charge of $3,209,439 during the fourth quarter of 1994. The majority
of the clinics to which this impairment charge relates were acquired in 1993.
Although the patient volumes and, therefore, revenues at these clinics during
the first several months of 1994 were lower than anticipated when they were
acquired, such shortfalls were initially attributed to adverse weather
conditions and other nonrecurring factors and, therefore, were considered to be
a temporary phenomenon. In the fourth quarter of 1994 it was determined that
there were also factors of a more permanent nature, related primarily to managed
health care and competition, to which a portion of these shortfalls at these
clinics could be attributed. No such impairment charges were incurred during
1995.
31
<PAGE>
Changes in goodwill during 1995 and 1994 are summarized as follows:
================================================================================
1995 1994
- --------------------------------------------------------------------------------
Balance, January 1, $ 2,577,630 $ 5,984,120
Goodwill amortization (74,115) (197,051)
Goodwill write-off -- (3,209,439)
----------- -----------
Balance, December 31, $ 2,503,515 $ 2,577,630
=========== ===========
================================================================================
4. Revenue, net
Revenue is reported net of allowances as follows:
================================================================================
1995 1994
================================================================================
Revenue $ 11,659,001 $ 11,420,040
Allowances for contractual and other adjustments (3,041,203) (3,623,065)
------------ ------------
Revenue, net $ 8,617,798 $ 7,796,975
============ ============
================================================================================
5. Supplemental disclosure of cash flows and noncash activities
Cash paid for interest and income taxes is as follows:
========================================================
1995 1994
========================================================
Interest $181,334 $239,780
Income taxes -- 20,500
========================================================
During 1995, the Company issued 1,310,000 shares of common stock to reduce the
outstanding principal of long-term debt by $345,688. Additionally, the Company
issued 120,000 shares of common stock, valued at $79,500, to the Company's 401K
plan.
During 1994, the Company issued 7,100,000 shares of common stock, 1,200,000
shares of Series A preferred stock and 500,000 shares of Series B preferred
stock to reduce the outstanding principal and interest of long-term debt by $4.8
million. Additionally, the Company issued 53,075 shares of common stock, valued
at $35,660 to the Company's 401K plan.
32
<PAGE>
6. Lease Commitments
The Company leases clinic facilities under several non-cancelable operating
leases expiring at various times between 1995 and 1999. Rent expense for these
operating leases was $543,600 in 1995 and $695,100 in 1994.
Future minimum payments under non-cancelable facility operating leases for the
five years subsequent to December 31, 1995 are:
==========================================================
Operating
Leases
==========================================================
1996 $542,230
1997 412,978
1998 164,064
1999 28,842
2000 5,092
----------
Total minimum lease payments $1,153,206
----------
==========================================================
33
<PAGE>
7. Notes payable and long-term debt
Notes payable and long-term debt consist of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Convertible promissory notes (convertible into 537,105 shares of CHCA common
stock) with interest rate of 7-10% issued in connection with business
acquisitions, payable in monthly installments through 2003 $900,858 $999,559
Convertible promissory notes (convertible into 255,123 of CHCA common stock)
with interest rate of 7-10% issued to employees in connection with
business acquisitions, payable in monthly installments through 2001 502,968 573,805
Promissory notes issued in connection with business
acquisitions, with average interest rate of 7-10%, payable
through 2001 396,600 550,051
Convertible promissory notes (convertible into 160,000 shares of CHCA common
stock) bearing interest of 10%, issued to a Director; principal due
September 15, 1998 120,000 100,000
Demand notes with interest paid monthly at prime rate plus 4% 89,432 89,432
Promissory note with interest rate of 12%, payable in monthly installments
through 1999 65,750 --
Convertible promissory notes (convertible into 80,000 shares of CHCA common
stock) bearing interest of 10% payable monthly; principal due
September 15, 1998 60,000 125,000
Non-interest bearing loan payable to officers; paid in January 1996 60,000 --
Promissory note issued to an employee in connection with a business acquisition
with interest rate of 7%, payable in monthly installments through
1995 -- 22,810
Non-interest bearing note payable with monthly payments through 1997 25,000 --
----------- -----------
2,220,608 2,460,657
Less: current portion of debt (521,248) (620,941)
----------- -----------
Long-term debt $1,699,360 $1,839,716
=========== ===========
</TABLE>
Substantially all of the Company's assets are security for the above debt.
At December 31, 1995, the Company was in default for non-payment of principal
and interest on several of its note payable obligations. Subsequently, the
Company cured these defaults by renegotiating and extending the payment terms of
these obligations, by issuing new convertible promissory notes and by remitting
pastdue payments of principal and interest. Accordingly, these notes have not
been called by the noteholders.
In December 1994 and January 1995, the Company issued $500,000 of short-term
notes, payable in September 1995. In connection with this financing, the Company
issued warrants to purchase 300,000 shares of the Company's common stock at
$0.75 per share. These warrants may be exercised at any time for a period of two
years. During August and September 1995, certain holders of these short term
notes exchanged $375,000 of the outstanding obligations for three-year 10%
convertible promissory notes, payable on September 15, 1998. In conjunction with
this transaction, $195,000 of these notes were converted into
34
<PAGE>
780,000 shares of the Company's common stock. Additionally, the Company repaid
$125,000 to note holders and raised equivalent funds by issuing 500,000 shares
of the Company's common stock.
During 1995, a holder of a convertible promissory note, issued in conjunction
with a business acquisition, exchanged approximately $26,000 of the outstanding
obligation for 30,000 shares of the Company's common stock.
During 1995, the Company issued a new convertible promissory note for the
outstanding balance of a promissory note. Under the convertible note, the
outstanding balance may be converted into equivalent shares of the Company's
common stock. No portion of the outstanding note was converted in 1995.
Aggregate annual long-term debt maturities for the next five years are:
========================================================
Year Ending December 31,
1996 $ 521,248
1997 191,292
1998 654,784
1999 211,928
2000 228,979
2001 and thereafter 412,377
----------
Total $2,220,608
==========
========================================================
Interest expense on long-term debt for the years ended December 31, 1995 and
1994 was $177,367 and $449,514, respectively.
In February 1996, the Company renegotiated a convertible promissory note and a
promissory note, both of which were issued in connection with a business
acquisition. Under the renegotiated agreements, the interest rate for these
notes was increased to 9.5% and the term of the notes was extended to 2002. In
consideration, the Company issued warrants to the noteholder to purchase $25,000
worth of the Company's common stock at $0.30 per share. The warrants may be
exercised anytime for a period of 3 years. Additionally, at the maturity of
these notes, the Company will issue to the noteholder $50,000 worth of the
Company's common stock based upon market prices in effect as of that date. This
transaction will be accounted for as a restructuring of debt in 1996.
The Company is currently renegotiating a convertible promissory note held by an
employee. It is expected that this note, which was originally due in 1996, will
be extended for five years with interest-only payments at 10% to be made in 1996
and 1997. In consideration, the Company will release the employee from
non-compete agreements and will issue $30,000 worth of the Company's common
stock based upon market prices in effect as of the date of the agreement. This
transaction will be accounted for as a restructuring of debt in 1996.
During 1996, pursuant to an arbitration agreement, the Company entered into a
three-year 12% note payable agreement for $65,750 with a vendor. Additionally,
the Company will issue $65,750 worth of the Company's common stock to the
vendor, based upon the market price of the stock at the time of the agreement.
35
<PAGE>
8. Common Stock, Preferred Stock, Warrants, Options and Stock Appreciation
Rights
Effective November 3, 1994 and as approved by the stockholders of the Company on
June 20, 1995 the Company adopted the 1994 Stock Option Plan (the 1994 Plan).
The 1994 Plan provides the Company the ability to grant options to purchase an
aggregate of 3,000,000 shares of common stock. Types of grants under the 1994
Plan include non-statutory stock options, incentive stock options and restricted
stock awards.
Options granted under the 1994 Plan shall become exercisable as determined by
the Options Committee of the Board of Directors (the Committee). The Committee
may, in any case or cases, prescribe that options granted under the 1994 Plan
become exercisable in installments or provide that an option may be exercisable
in full immediately upon the date of its grant.
At the end of 1994 the Company granted 1,800,000 options to its officers and
directors to acquire the Company's stock at $.97 per share, the fair market
value at the date of grant. At the time of the grant 600,000 were immediately
vested with 1,000,000 of the balance to be vested only upon the achievement of
certain future performance goals and 200,000 options ratably vested over the
next four years. During 1995, 666,667 of these options expired due to the
non-achievement of certain goals and the termination of an officer.
Additionally, 50,000 options became vested in 1995 in accordance with the
vesting schedule.
Due to the termination of an officer, 204,584 options issued prior to 1994 to
the officer expired during 1995.
In connection with a 1993 private offering of 560,000 shares of the Company's
common stock, a warrant to purchase 56,000 shares at $1.75 per share was issued
to the underwriter associated with such offering. The warrants may be exercised
at any time for a period of three years, expiring September 1996. Additionally,
the Company issued options to purchase 150,000 shares to an investor relations
firm at an average price of $2.00 per share. These options also expire in
September, 1996.
In connection with the exchange of convertible debt as of June 30, 1994, the
Company issued 1,227,305 shares of Series A preferred stock. Additionally, on
October 24, 1994 the Company issued 500,000 shares of Series B preferred stock.
The holders of the preferred stock have the right to convert such stock into
Company common stock at a conversion price of $.57 per share for each share of
Series A and $.25 per sharefor each share of Series B. The preferred stock
requires cumulative dividends at the rate of 6% per annum. Cumulative dividends
in arrears totalled $155,458 at December 31, 1995. No dividends were declared in
1995 or 1994; therefore, cumulative dividends in arrears are not recorded in the
accompanying Consolidated Balance Sheet. In the event the Company raises in
excess of $1.5 million additional equity at a per share price in excess of $.75,
the holders of Series A and B preferred stock are required to convert their
preferred stock into common stock.
36
<PAGE>
A summary of options and warrants, collectively referred to as options, is as
follows:
================================================================================
1995 1994
================================================================================
Options outstanding January 1 3,169,084 1,213,084
Granted 300,000 2,200,000
Canceled (871,251) (244,000)
Options outstanding December 31, 2,597,833 3,169,084
========= =========
Price range for options granted during
the year. $.75 $ .50 - .97
Options exercisable at December 31, 2,014,567 1,901,517
================================================================================
A summary of stock appreciation rights ("SARs") is as follows:
1995 1994
================================================================================
SARs outstanding January 1 1,000 4,000
Exercised (1,000) (2,400)
Canceled -- ( 600)
SARs outstanding December 31 -- 1,000
====== ======
SAR price for SARs exercised during
the year. $0.37 $0.37
SARs exercisable at December 31 -- 1,000
================================================================================
37
<PAGE>
9. Net loss per share
Net loss per share is computed by dividing the net loss for the year, adjusted
for undeclared cumulative preferred dividends, by the weighted average number of
common shares outstanding during each year. The number of shares used in the
computation for the years ended December 31, 1995 and 1994 is 13,771,855 and
8,690,517, respectively.
10. Litigation
There are actions pending against the Company arising out of the normal conduct
of business. In the opinion of management the amounts, if any, which may be
awarded with these claims would not have a significant impact on the Company's
consolidated financial position and results of operations.
11. Related parties
The Company retained legal services from the law firm of a former director of
the Company. The director's firm was paid $32,937 and $25,769 for 1995 and 1994,
respectively.
The Company rents rehabilitation clinics from an employee. Total rental expense
of $134,520 was paid by the Company in 1995 and 1994.
12. Employee costs and benefit plan
Effective March 1, 1992, the Company adopted the 401(K) Savings Plan (the Plan)
of its subsidiary company, PTS Rehab, Inc, for all eligible employees of the
Company and its subsidiaries. Under the provisions of the Plan, the Company
matches 100% of the first 3% of employee contributions. All employees who have
reached 21 years of age and have completed one year of service with a minimum of
1,000 hours worked per year are eligible to participate in the Plan. The
Company's expense in 1995 and 1994 related to the plan was $79,500 and $68,300,
respectively. During 1995 and 1994 the Company issued 120,000 and 53,075 shares
of common stock to the Plan reflecting the Company's matching contribution for
employee's contributions during 1995 and 1994, respectively.
38
<PAGE>
13. Accrued Expenses and Other Liabilities
Components of Accrued Expenses and Other Liabilities are as follows:
1995 1994
---- ----
Accrued expenses $214,583 $204,119
Corporate taxes and other liabilities -- 264,000
-------- --------
Total $214,583 $471,119
======== ========
14. Income Taxes and Deferred Income Tax
The provision for income taxes on income from continuing operations in 1995 and
1994 is comprised of minimum taxes due to various states in which the company
operates.
The tax effects of temporary differences that give rise to the tax assets and
liabilities are as follows:
1995 1994
---- ----
Deferred tax assets:
Net operating loss carryforwards $1,493,000 $ 897,000
Goodwill 889,000 1,286,000
Provision for doubtful accounts 326,000 398,000
Other (investment tax credits) 165,000 163,000
----------- -----------
2,873,000 2,744,000
Deferred tax liabilities:
Fixed assets (138,000) (109,000)
----------- -----------
2,735,000 2,635,000
Valuation allowance (2,735,000) (2,635,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
A valuation allowance must be established for deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. The Company has
determined that a valuation allowance is required since it is not certain that
the results of future operations will generate sufficient taxable income to
realize the deferred tax asset.
At December 31, 1995, the Company has federal net operating loss carryforwards
available to reduce future taxable income and investment tax credit
carryforwards available to reduce future federal tax liability of approximately
$4,391,000 and $163,000 respectively. These carryforwards expire in varying
amounts from approximately 1999 through 2009. A substantial change in the
Company's ownership, as defined under Section 382 of the Internal Revenue Code,
may significantly
39
<PAGE>
limit the future utilization of carryforwards incurred prior to an ownership
change. In 1995 and 1994, significant stock transactions occurred which may
result in such limitation being applied.
However, management has not yet been able to determine if a substantial change
in ownership, as defined, did occur in 1995 or 1994 or the extent of any
potential limitation on future utilization of its carryforwards.
15. Financing
During 1995 the Company was unable to make certain scheduled principal and
interest payments to noteholders and was required to negotiate extended payment
terms in certain cases and issue convertible promissory notes in exchange for
short-term notes in other cases. If the Company continues to incur operating
losses, the Company's working capital shortfalls will become even more
pronounced and make it increasingly difficult for the Company to meet scheduled
debt repayments. The Company's losses from operations in each of its four most
recent years have resulted in it having negative net tangible assets at December
31, 1995. Additionally, the Company is substantially dependent upon its
factoring arrangements pursuant to which it has assigned a certain portion of
its accounts receivable to support its operations.
The matters described above make it imperative for the Company to maintain or
increase its present factoring arrangements, to obtain additional financing, and
to take actions which will result in the Company becoming profitable and
generating positive cash flow. The Company continues to pursue additional
financing, but no assurances can be given that any additional financing may be
available or, if available, that it will be on terms that are acceptable to the
Company. If the Company is unsuccessful in achieving the above, this would have
a material adverse effect on the Company.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Consolidated Health Care
Associates, Inc.
Date: May 22, 1996 /s/ Robert M. Whitty
--------------------
ROBERT M. WHITTY
President, Treasurer
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Second Tier Subsidiaries are listed under the
Name of the Parent Subsidiary
Name State of Incorporation
---- ----------------------
Consolidated Health Care Associates, Inc. Connecticut
Consolidated Imaging Systems, Inc. Connecticut
PTS Rehab, Inc. Connecticut
Associated Billing Corporation Massachusetts
Consolidated Rehabilitation Services, Inc. Delaware
