As filed with the Securities and Exchange Commission on February 11, 1997
Registration No. 33-98018
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
(Name of small business issuer in its charter)
NEVADA 8049 91-1256470
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(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number
incorporation or
organization)
38 POND STREET
FRANKLIN, MASSACHUSETTS 02038
(508) 520-2422
(Address and telephone number of principal
executive offices and principal place of business)
ROBERT M. WHITTY,
PRESIDENT
CONSOLIDATED HEALTH
CARE ASSOCIATES, INC.
38 POND STREET
FRANKLIN, MASSACHUSETTS 02038
(508) 520-2422
(Name, address and telephone
number of agent for service)
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COPIES TO:
ARTHUR D. EMIL, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 715-9100
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
<PAGE>
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<CAPTION>
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED/1/ /3/ PRICE PER SHARE/2/ OFFERING PRICE/2/ REGISTRATION/4/
<S> <C> <C> <C> <C>
Common Stock 6,047,017 shares $0.31 $2,297,866 $696
($.012 Par Value
==========================================================================================================================
</TABLE>
/1/ All of shares of Common Stock being registered hereby are for the account
of selling stockholders. No other shares of the Company's Common Stock are
being registered pursuant to this offering.
/2/ Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c) of the Securities Act of 1933, as amended (the
"Act").
/3/ Pursuant to Rule 416 of the Act there are also being registered hereunder
such additional shares as may be issued to the selling stockholders because
of future stock dividends, stock distributions, stock splits or similar
capital readjustments or, in the case of the holders of warrants, the
operation of the anti-dilution provisions thereof.
/4/ $799 previously paid.
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CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
FORM SB-2
--------------------------
CROSS-REFERENCE SHEET
Showing the location in the Prospectus of the information required by Part I of
Form SB-2.
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ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Coverage Inside Front and Outside Back Cover Pages of
Pages of Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary, Risk Factors
4. Use of Proceeds Prospectus Summary, Use of Proceeds
5. Determination of Offering Price Not applicable
6. Dilution Not applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Front Cover Page of Prospectus; Plan of
Distribution
9. Legal Proceeding Business - Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain
Beneficial and Management Principal Stockholders
12. Description of Securities Description of Securities
13. Interest of Named Expert and Counsel Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Not applicable
15. Organization within Last Five Years Certain Relationships and Related Transactions
16. Description of Business Business
17. Management's Discussion and Analysis Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property Business
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<PAGE>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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19. Certain Relationships and Related
Transactions Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters Price Range of Common Stock
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Management Discussion and Analysis of
Accountants and Financial Disclosure Financial Condition and Results of Operations
</TABLE>
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<PAGE>
PROSPECTUS
6,047,017 SHARES OF COMMON STOCK
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
This Prospectus covers 6,047,017 shares of common stock, $0.012 par
value (the "Common Stock"), of Consolidated Health Care Associates, Inc. (the
"Company"), with respect to the sale by certain selling stockholders of an
aggregate of up to 533,333 shares of Common Stock upon the exercise of warrants
and options acquired by certain of the selling stockholders from the Company in
private transactions (such warrants and other options being referred to as the
"Rights"), up to an aggregate of 5,217,164 shares of Common Stock acquired by
certain of the selling stockholders from the Company or from a stockholder of
the Company in private transactions and up to 296,520 shares of Common Stock
issuable upon the conversion of a promissory note (the "Convertible Note")
acquired by a selling stockholder from the Company in a private transaction.
Unless the context otherwise requires, all of the foregoing persons shall be
referred to collectively as the "Selling Stockholders."
The Common Stock may be offered from time to time by the Selling
Stockholders through ordinary brokerage transactions in the over-the-counter
markets, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices. The Company will not receive any of
the proceeds from the sale of Common Stock by the Selling Stockholders. The
Company will pay for the expenses of this offering which are estimated at
$60,000. See "Selling Stockholders and Plan of Distribution."
The Common Stock is traded in the over-the-counter market and is quoted
on the Nasdaq Small-Cap Market under the symbol "CHCA." On February 7, 1997, the
closing bid price of the Common Stock as reported by Nasdaq was $.31. See "Risk
Factors", and "Price Range of Common Stock."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE
PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 2.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY __, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, New York, New York 10048. The Commission maintains a site on the
World Wide Web, and the reports, proxy statements and other information filed by
the Company with the Commission may be accessed electronically on the Web at
http://www.sec.gov. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, the
information in this Prospectus does not give effect to the issuance of shares of
Common Stock issuable upon exercise of outstanding options and warrants,
including the Rights or the conversion of any convertible promissory notes.
THE COMPANY
Consolidated Health Care Associates, Inc., a Nevada corporation
(hereinafter referred to as the "Company"), provides outpatient rehabilitation
services through a network of outpatient clinics, principally in the Northeast
and Mid-Atlantic regions, including five in Massachusetts, four in Pennsylvania,
three in Delaware and one in Florida. The Company also provides managed
rehabilitation services, principally through contract staffing in Massachusetts,
Pennsylvania, Florida, Delaware and New York. The Company has entered into a
letter of intent to sell three of its Pennsylvania clinics. See "Current
Developments."
The Company was organized in June 1984 as Consolidated Imaging
Corporation. In June 1992, the name of the Company was changed to Consolidated
Health Care Associates, Inc. Its executive offices are located at 38 Pond
Street, Franklin, Massachusetts 02038 and its telephone number is (508)
520-2422. References to the "Company" include Consolidated Health Care
Associates, Inc., its subsidiaries and predecessor, unless the context otherwise
requires.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities offered............................. 6,047,017 shares
Common Stock outstanding prior to the
offering..................................... 15,573,500 shares
Common Stock to be outstanding after the
offering/1/.................................. 16,403,353 shares
Use of Proceeds................................ Any proceeds received by the Company from time to time upon
exercise of the Rights will be used for working capital and
general corporate purposes. The Company will not receive any
proceeds from any sales of Common Stock by the Selling
Stockholders.
Risk Factors.................................. The securities offered hereby involve a high degree of risk.
See "Risk Factors." No assurance can be given that any of the
Rights will be exercised or that the Company will receive any
proceeds from the sale of any securities
Nasdaq Symbols................................ Common Stock - CHCA
</TABLE>
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/1/ Assumes exercise of all of the Rights and conversion of the Convertible
Note but no other outstanding options, warrants or convertible promissory
notes.
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk, including,
but not necessarily limited to, the risk factors described below. Prospective
investors, prior to making an investment in the Company should carefully
consider the risks and speculative factors inherent in and affecting the
business of the Company and this offering, including the following:
1. History of Substantial Losses; Accumulated Deficit; Future Operating
Results. The Company has incurred net losses of $458,272, and $4,582,000 and
$608,855 for the nine months ended September 30, 1996 and the years ended
December 31, 1994 and December 31, 1995, respectively, and had an accumulated
deficit of $7,957,366 at September 30, 1996. Unfavorable general economic
conditions, including current and future downturns in the economy, could have an
adverse effect on the frequency of visits by patients to the Company's
facilities. In addition, changes in the manner of reimbursement by third party
insurance providers and other health care payers could also reduce the frequency
of patients visits, resulting in declining revenue and continued losses. See the
Company's Financial Statements included elsewhere in this Prospectus.
2. Limited Available Capital; Significant Capital Requirements; Need
for Additional Financing. The Company's capital requirements have been and will
continue to be significant. The Company has been substantially dependent upon
private placements of its debt and equity securities, on loans from its
principal stockholder, and from time to time, on short-term loans from its
officers, directors and other stockholders to fund requirements. See "Certain
Transactions." The Company has no current arrangements with respect to sources
of additional financing and there can be no assurance that the Company will be
able to obtain additional financing on terms acceptable to the Company. The
Company's independent auditors have included an explanatory paragraph in their
report dated April 5, 1996 on the Company's Financial Statements stating that
the financial statements have been prepared on the assumption that the Company
will continue as a going concern and that financing uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto.
3. Factoring Arrangements. The Company does not have a commercial bank
credit facility and depends significantly upon factoring arrangements to fund
its operations. Under these arrangements, the Company sells and assigns to a
factor certain of its accounts receivable for a purchase price, payable upon
collection, of the gross amount of the receivables, less certain allowances and
less a factoring commission. Pending collection, the factor makes advances to
the Company of up to 85% of the purchase price of qualifying receivables, and
the Company pays interest on such advances. Advances are in the sole discretion
of the factor, and the factor may cease making advances for any reason,
including if it deems itself insecure. The Company presently has two factoring
arrangements. One of these arrangements, under which there were advances of
approximately $494,000 at September 30, 1996, expired in December 1996 but
continues in effect as explained below. The other factoring arrangement under
which there were advances of approximately $688,000, expires in June 1997. Both
factoring arrangements are deemed renewed from year to year after their
expiration unless the factor elects to, at any time with thirty (30) days prior
written notice to the Company, terminate the arrangements. The Company has not
received any such termination notice and expects that these arrangements will
remain in force, although there can be no assurances given to this effect. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources." If the Company's factors were to
cease or substantially limit their making of advances or if the Company's
factoring arrangements were to expire or terminate without renewal or
replacement, the Company's ability to fund its operations would be in jeopardy.
4. Competition. The physical therapy and health care personnel
industries are highly competitive and consists of many competitors, some of
which have substantially greater financial and other resources than the Company.
These competitors include HealthSouth and Rehability, Inc. In its contract
staffing business, the Company faces competition from a variety of national
providers of healthcare personnel that have substantially greater financial and
other resources than the Company. In addition, many smaller facilities that
compete with the Company in a variety of markets have greater resources than
individual competing facilities owned by the Company. See "Business --
Competition."
5. Dependence Upon Qualified Therapists. The Company's business depends
on its ability to continue to recruit and retain a sufficient number of
qualified licensed therapists. Although the Company believes it has an effective
recruitment process, there is no assurance the Company will be able to secure
arrangements with sufficient numbers of qualified board certified therapists or
retain the services of such therapists. The Company recruits its personnel from
a variety of employment agencies and services, including certain services that
recruit therapists from abroad. If the Company experiences delays or shortages
in obtaining access to qualified therapists, the Company would be unable to
provide services in both aspects of its business, resulting in reduced revenues.
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6. Exposure to Professional Liabilities. The Company may become
involved in malpractice claims with the attendant risk of damage awards.
Although the Company presently maintains malpractice insurance in the aggregate
amount of $3,000,000 and $1,000,000 on a per claim basis, there can be no
assurance that a future claim or claims will not exceed the limits of available
insurance coverage or that such coverage will continue to be available at
commercially reasonable rates, if at all. In the event of a successful claim
against the Company that is uninsured in whole or in part, the Company's
business and financial condition could be materially adversely affected.
7. Government Regulation. The health care industry is subject to
numerous federal, state and local regulations. If the Company were found to fail
to comply with any of the regulations to which it is subject, it may be subject
to penalties, fines or may be required to halt certain aspects of its business.
Although many states prohibit commercial enterprises from engaging in the
corporate practice of medicine, the states in which the Company currently
operates do not prohibit the Company from providing physical therapy services.
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
corporation's practice of physical therapy itself could be specifically
prohibited in some states. In the event that the Company is 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. In
addition, the Company could be subject to fines and penalties. In addition, 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 reduce
profitability.
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 approval or licenses and, if so, that such approvals or licenses
could be obtained.
Twelve of the Company's clinics are certified Medicare providers. In
order to receive Medicare reimbursement, a clinic must meet the applicable
conditions or 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
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 an interpretive 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 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" was expanded
in 1993 to prohibit 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
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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 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 its 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.
8. Dependence on Third Party Payors. Approximately 80% of the Company's
revenues are derived from managed care health plans, such as health maintenance
organizations or preferred provider groups and, to a lesser extent, from private
payor and government reimbursement programs. See "Business -- Sources of
Revenue/Reimbursement." Substantial healthcare reforms have been proposed,
including the implementation of a government-directed national healthcare system
and stringent healthcare cost- containment measures. The implementation, extent,
particulars and timing of these reforms cannot be predicted. Adoption of certain
of the proposals could adversely effect the Company's business and prospects.
(The balance of the Company's revenue is generated through the Company's
Contract Service Division.) See "Business -- Sources of Revenue/Reimbursement."
9. Limited Trading Market; Volatility of Common Stock Price. Although
the Common Stock is currently traded in the Nasdaq Small Cap market, there can
be no assurance that a trading market for the Company's shares will continue to
exist in the future. In addition, the market price of the Company's Common Stock
has been, and may in the future be, highly volatile. Factors such as a change in
the services or products provided by the Company or its competitors, as well as
changes in the health care industry, could have a significant impact on the
market price of the Company's Common Stock. Further, in recent years, the
securities markets have experienced a high level of price and volume volatility
and the market prices of securities for many companies, particularly emerging
companies, have experienced wide fluctuations which have not necessarily been
related to the operating performance of such companies.
10. Control by Principal Stockholders. Renaissance Capital Partners II,
Ltd. ("Renaissance") owns, beneficially, an aggregate of approximately 47% of
the issued and outstanding shares of Common Stock, including shares of common
stock issuable upon conversion of Series A Preferred Stock and Series B
Preferred Stock. Accordingly, Renaissance, together with a small minority of
other stockholders, could be in a position to control the outcome of matters
requiring a vote of stockholders including the election of the members to the
Board of Directors of the Company. See "Principal Stockholders."
11. Possible Delisting of Securities from Nasdaq: Risks Relating to
Low-Priced Stocks. The Common Stock is listed on the Nasdaq Small Cap Market. In
order to meet Nasdaq's listing requirements, however, the Company must maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share, except
that if the Company falls below such minimum bid price, it will remain eligible
for continued inclusion in Nasdaq if the market value of the public float is at
least $1,000,000 and the Company has $2,000,000 in capital and surplus. The
failure to meet these maintenance criteria in the future may result in the
delisting of the Company's securities from Nasdaq, and trading, if any, in the
Company's securities would thereafter be conducted in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor could find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of the Company's securities. Although the bid price for the
Company's Common Stock has fallen below $1.00, because its capital and surplus
at September 30, 1996 was $2,077,111, the Company was in compliance as of
September 30, 1996. However there are proposed changes to the Nasdaq listing
criteria which in certain respects would impose stricter criteria for continued
listing. Also, future losses may cause the Company to fall out of compliance
with the NASDAQ listing requirements and subject the Company to delisting.
If the Common Stock were to become delisted from trading on Nasdaq and
the trading price of the Common Stock were to remain below $5.00 per share,
trading in the Common Stock would also be subject to the requirements of certain
rules promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exemptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers
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<PAGE>
from effecting transactions in the Common Stock, which could severely limit the
market liquidity of the Common Stock and the ability of purchasers in this
offering to sell their Common Stock in the secondary market.
12. No Dividends. The Company has paid no cash dividends on its Common
Stock to date. Payment of dividends on the Common Stock is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition and other relevant factors.
Moreover, the shares of Series A Preferred Stock and Series B Preferred Stock
are prior in right to the shares of Common Stock as to dividends. The Company
does not intend to declare any dividends on its Common Stock in the foreseeable
future. See "Description of Securities."
13. Authorization of Preferred Stock. The Company's Articles of
Incorporation authorize the issuance of "blank check" preferred stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors. The Company has designated 1,727,305 shares as Series A
Preferred Stock and Series B Preferred Stock (together "Preferred Stock") and,
as of the date of this Prospectus, there were 1,727,305 shares of Preferred
Stock outstanding. See "Description of Securities -- Preferred Stock." The
Preferred Stock has a liquidation preference of $1.00 per share plus accrued and
unpaid dividends. Each share of Series A Preferred Stock is currently
convertible, at the option of the holder, into 1.75 shares of Common Stock. Each
share of Series B Preferred Stock is currently convertible, at the option of the
holder, into four shares of Common Stock. These conversion rates are subject to
further adjustment in favor of the holders of the Preferred Stock. The Board of
Directors is empowered, without stockholder approval, to authorize the issuance
of additional shares of preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. Such preferred stock could
be utilized, under certain circumstances, to discourage, delay or prevent a
change in control of the Company. Although the Company has no present intention
to issue any additional shares of its preferred stock, there can be no assurance
that the Company will not do so in the future. See "Description of Securities."
14. Shares Eligible for Future Sale; Registration Rights. Approximately
11,023,000 of the approximately 15,573,000 shares of Common Stock outstanding as
of the date of this Prospectus are "restricted securities," as that term is
defined under Rule 144 promulgated under the Act. As of the date of this
Prospectus, approximately 5,600,000 of such shares are eligible for sale under
Rule 144. No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of such shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Common Stock may be sold in the public market likely
would have a material adverse effect on prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
15. Significant Outstanding Options, Warrants and Convertible
Securities. As of the date of this Prospectus, there are outstanding (vested and
unvested) stock options and warrants to purchase an aggregate of approximately
2,475,000 shares of Common Stock at exercise prices ranging from $0.24 to $2.08
per share. In addition, there are outstanding shares of Preferred Stock
convertible into an aggregate of approximately 4,153,000 shares of Common Stock
and promissory notes convertible into an aggregate of approximately 1,382,000
shares of Common Stock. To the extent that outstanding options or warrants are
exercised or convertible securities are converted, dilution to the Company's
stockholders will occur. Moreover, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of outstanding options, warrants and convertible securities can be expected to
exercise or convert them at a time when the Company would, in all likelihood, be
able to obtain any needed capital on terms more favorable to the Company than
the exercise or conversion terms provided by such outstanding securities.
USE OF PROCEEDS
The Company is not offering any securities pursuant to this prospectus
and will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. Upon exercise of the Rights, the Company could realize up to
approximately $527,000 in net proceeds after deducting expenses of this
offering. The net proceeds of such issuances, may be used by the Company for,
among other things, working capital and general corporate purposes. No assurance
can be given that any Rights will be exercised. The Company has agreed to pay
the expenses incurred in connection with this offering, estimated to be
approximately $60,000.
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DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Company
does not intend to declare any dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq Small-Cap Market
under the symbol CHCA. The following table sets forth the high and low bid
prices for the Common Stock, as reported by the National Association of
Securities Dealers, Inc. for the period indicated. These prices, represent
quotations between dealers (not actual transactions) and do not include retail
markups, markdowns or commissions.
1994 HIGH LOW
------------------------------------------------------------
First Quarter $1.1875 $0.7500
Second Quarter 1.0000 0.4375
Third Quarter 0.7500 0.4062
Fourth Quarter 1.5000 0.6562
1995 HIGH LOW
------------------------------------------------------------
First Quarter $1.0625 $0.6250
Second Quarter 0.8125 0.5000
Third Quarter 0.5625 0.3750
Fourth Quarter 0.3750 0.1875
1996 HIGH LOW
------------------------------------------------------------
First Quarter $0.5625 $0.2500
Second Quarter 0.6250 0.3437
Third Quarter 0.5312 0.3125
Fourth Quarter 0.4375 0.2500
The closing sale price of the Company's Common Stock on February 7,
1997 was $.31. As of December 31, 1996, the number of stockholders of record of
the Company's Common Stock was approximately 600. The Company believes that, in
addition, there are in excess of 600 beneficial owners of its Common Stock whose
shares are held in "street name."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 thirteen as of September 30, 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, closed two
clinics in 1995 and two in 1996.
In response to the decline in the Company's working capital and
available cash in 1995, the Company extended the time needed to satisfy its
obligations to vendors resulting in increased accounts payable. In addition, as
discussed below, during 1995 and the first nine months of 1996, the Company was
unable to make certain scheduled payments to noteholders and certain vendors and
was required to negotiate extended payment terms, issue convertible promissory
notes in exchange for short-term notes and issue Common Stock in exchange for
trade payables. If the Company continues to incur operating losses, the
Company's working capital shortfalls will become even more pronounced, making 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 and at
September 30, 1996. 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 material adverse effect on the Company. The
Company's independent auditors have included an explanatory paragraph in their
report dated April 5, 1996 on the Company's Financial Statements stating that
the financial statements have been prepared on the assumption that the Company
will continue as a going concern and that financing uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
See the Financial Statements and notes thereto.
The Company has developed a strategic plan for achieving future
profitable operations, which includes both its existing operations and a new
program of managed rehabilitation services. This plan with respect to the
existing operations consists of the following components:
o The Company operates 13 physical therapy clinics located in the Eastern
United States. The Company intends to integrate operations of its
Contract 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.
o The Company's Contract Services Division has continued to experience
growth since its formation in September 1994. The Company believes that
this growth will continue. With the integration of physical therapy
clinics with the Company's Contract 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.
o 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 expanding the
scope of its activities to include
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the delivery of services off-site, both in-home and at ancillary
service facilities such as schools, nursing homes and assisted living
residences.
The Company is also developing a program of managed rehabilitation
services ("MRS"), pursuant to which the Company would enter into licensing
arrangements with independently owned host providers of rehabilitative therapy
("hosts"), such as outpatient clinics, small contract agencies and independent
home care agencies. Under these arrangements, the hosts would be the actual
providers or coordinators of rehabilitative therapy services, in host clinics or
at hospitals, subacute care facilities, schools, homes and assisted living
residences. The Company would direct service contracts to the hosts, arrange
staffing on an as-requested basis, assume responsibility for administration,
payroll, billing and collections and advise the hosts on contract management.
The Company expects that over time the MRS business will become a substantial
focus of the Company's operations. However, although potential hosts for the MRS
business have been identified, the Company as yet has not entered into any MRS
licensing arrangements.
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. The Company's liquidity, as measured by
its cash and working capital, increased by $5,225 and $16,282 respectively in
the first nine months of 1996 as compared to the same period in 1995.
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.
Accounts receivable increased by $59,177 during the first nine months of 1996,
primarily as a result of an increase in non-factored receivables with the
Company's factor.
The number of days average net revenues in net receivables at December
31, 1995 was 93 compared to 101 at December 31, 1994. Accounts payable increased
by $494,000 in 1995 as compared to 1994, respectively. Accounts payable
increased by $156,915 in the first nine months of 1996.
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, 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. The decrease from 1994 to
1995 is primarily attributable to the Company's factoring arrangements, which
were first entered into in the third quarter of 1995. Cash provided by operating
activities was $72,383 in the first nine months of 1996, compared with cash used
by operating activities of $103,327 in the first nine months of 1995.
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. Cash used in investing activities, consisting of the
purchase of equipment, was $21,855 in the first nine months of 1996, compared
with $112,016 in the first nine months of 1995.
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 in 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.
During 1996, the Company 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
noteholders. See "Debt Restructuring" below. Financing activities in 1994 used
funds of $975,890. Proceeds from debt totaled $325,000, issuance of preferred
stock provided $448,161, and payments of $1,749,051 were made on long-term debt.
Cash used by financing activities was $45,303 in the first nine months of 1996,
as compared with investing activities of $14,755 in the first nine months of
1995. The change is attributable to principal payments of debt in 1996.
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At September 30, 1996, the Company had outstanding approximately
$1,672,151 in notes payable and long-term debt, approximately $59,500 of which
was paid prior to December 31, 1996. Of such amount, approximately $1,440,000 is
related to business acquisitions completed prior to 1995. During the first nine
months of 1996, several notes were renegotiated. The new notes have longer
maturities with lower monthly payments, but have higher interest rates ranging
between 7% and 10%. See "Debt Restructuring" below. Total long-term debt
decreased during the nine months ended September 30, 1996 by $204,000 primarily
as a result the conversion in July 1996 of a convertible promissory note
previously issued in connection with a business acquisition. Under the
conversion, the outstanding balance of approximately $182,305 of the convertible
promissory note and certain accounts payable due the note holder of $6,399, were
converted to common stock at a conversion price or $.45 per share into 419,342
shares of common stock.
In June 1995, Consolidated Rehabilitation Services, 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 by the Company at a rate
equal to the greater of 9% per annum or 2% over the designated prime rate and 5%
over 30-day LIBOR. This factoring agreement expired in December 1996, but has
been deemed extended on a year-to-year basis unless terminated by the factor on
30 days' prior notice. As of September 30, 1996 the Company had received
advances of approximately $494,000 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 60%
of certain of the Company's accounts receivable, up to a maximum aggregate
balance of $750,000. In January of 1997, the agreement with the factor was
modified to allow up to a maximum aggregate balance of $1,500,000. Interest is
payable by the Company at a rate equal to the greater of 9% per annum or 2% over
the designated prime rate. In addition, the Company is obligated to make other
payments to the lender. This factoring agreement expires in June 1997. At
September 30, 1996, $688,500 had been advanced under this agreement.
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.
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. During the nine months ended
September 30, 1996 , stockholders' equity increased $98,859. This increase was
due to the issuance of common stock to the Company's 401(k) Profit sharing Plan
of $59,676, conversion of certain accounts payable or debt to common stock
totaling $407,455, renegotiation of certain convertible promissory notes in the
amount of $80,000 through the issuance of common stock and exercise of options
by a member of the Board of Directors in the amount of $10,000, offset by a net
loss of $458,272.
The Company has entered into a letter of intent for the sale of three
of its Pennsylvania clinics for a purchase price of $1.1 million in cash and a
note, subject to adjustment. The buyer would also assume up to $200,000 in
associated liabilities. The clinics proposed to be sold accounted for
approximately 22% and 23% of the Company's total revenues for the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
The sale is subject to the buyer's due diligence, mutually satisfactory
documentation and other conditions, and there can be no assurance that the sale
will be consummated. See "Current Developments."
See also "Future Trends, Demands, Commitments and Uncertainties" for
additional matter relating to liquidity and future management plans.
Debt Restructuring
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 the balance of the short-term notes which it obtained by
selling 500,000 shares of common stock.
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In January 1995, a holder of a 9% convertible promissory note due
December 1997 (the "1997 Note"), issued in connection with a business
acquisition, exchanged approximately $26,000 of the outstanding obligation for
30,000 shares of the Company's common stock. Additionally, the same holder
forgave approximately $31,000 of the outstanding balance of another note in
exchange for a new 9% convertible promissory note due December 1999 (the "1999
Note") in the principal amount of $235,000, such amount being the remaining
outstanding balance of the old note. The 1999 Note was convertible into shares
of Common Stock at a price per share equal to the greater of $0.75 or 100% of
the average bid and ask price of the Common Stock at the end of the month
preceding the date of conversion. In July of 1996, the Company renegotiated the
1997 Note and the 1999 Note, which then had aggregate principal and accrued
interest of $399,904, together with certain other liabilities (in the principal
amount of approximately $14,300) due the holder of such notes. The holder has
agreed to convert the 1997 Note, together with a portion of the other
liabilities, in the total amount of $188,704 into shares of Common Stock at a
conversion price of $0.45 per share (419,342 shares). The holder has also agreed
to exchange the 1999 Note, together with a portion of the other liabilities, for
a convertible promissory note in the principal amount of $225,479. The new note
will bear interest at 9% per annum, have fixed monthly payments of $2,500, be
due with all then unpaid principal in May 2001 and continue to be convertible
into shares of Common Stock on the same terms as the 1999 Note.
In January 1996, the Company issued to a vendor a three-year 12%
promissory note in the amount of $65,750 in satisfaction of an obligation to the
vendor in the same amount and agreed to issue shares of Common Stock, in
satisfaction of an additional $65,750 in trade liabilities due such vendor.
Subsequently, the Company issued to the vendor 210,400 shares of Common Stock,
constituting $65,750 in value of Common Stock at $0.3125 per share.
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. As renegotiated,
the interest rate of the notes was increased to 9.5% and the term of the notes
was extended to 2002. In consideration of the renegotiation, the Company issued
to the noteholder 177,778 shares of Common Stock, constituting $50,000 in value
of Common Stock at $0.28125 per share. The Company also issued to the noteholder
three-year options to purchase 83,333 shares of the Company's common stock at an
exercise price of $0.30 per share.
In April 1996, the Company renegotiated a 7.5% convertible promissory
note due May 1996 in the principal amount of $413,000, which note was issued in
connection with a business acquisition. As renegotiated, the note will be due
April 2001 and will bear interest at 10% per annum. Interest only will be
payable during the first two years of the note's term, and the note will be
self-liquidating over the remaining three years. In consideration of the
renegotiation of the note, the Company issued to the noteholder 120,000 shares
of Common Stock, constituting $30,000 in value of Common Stock at $0.25 per
share.
In September of 1996, the Company converted a convertible promissory
note previously issued in connection with a business acquisition. The
outstanding balance of the convertible promissory note of approximately
$182,305, together with certain accounts payable due the noteholder in the
amount of $6,399, was converted to Common Stock at a conversion price of $.45
per share.
The consideration granted to the noteholders during 1996 is being
amortized to interest expense over the remaining term of the respective notes.
Other Issuances of Shares
The Company issued an additional 524,000 shares in 1996, including
300,000 shares to its outside directors in consideration of past services on the
Board, 204,000 shares to Renaissance and certain other persons in consideration
of certain loans to the Company and 20,000 shares to a former executive as a
stock bonus.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995
Net revenues increased 3.5% or $233,113 during the nine months ended
September 30, 1996 as compared to the same period in 1995. Out-patient net
revenues continue to increase, despite the continued impact of managed care, as
a result of the on-going integration of the Contract Services Division in the
Company owned out-patient clinics, and, to a lesser extent, more efficient
billing procedures in the clinical operations.
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Operating costs represented 76.2% of net revenues during the nine
months ended September 30, 1996 as compared to 84.8% for the same period of
1995. The $395,691 decrease in operating costs for the nine months ended
September 30, 1996 was principally due to the continued integration of the
Company's Contract Services Division in the out-patient clinics and the
resulting reduction in subcontract labor expenses. Additionally, the Company
continued to achieve lower recruiting, travel, and fringe benefit costs
resulting from this integration of services.
Administrative and selling costs constituted $1,662,655 or 24.1% of net
revenue during the nine months ended September 30, 1990 as compared to $829,147
or 12.4% for the same period of 1995. The increase reflects administrative and
selling expenses that were higher by $833,508 for the nine months ended
September 30, 1996 compared to the prior year period. A significant portion of
the increase relates to non-operational expenses that included legal and
accounting costs associated with the filing of a registration statement for the
sale of shares by certain stockholders, stock awards associated with financing
activities and Board of Directors compensation, and costs associated with a
proposed underwriting. To a lesser extent, higher administrative cost resulted
from compensation expenses paid to the Company's chief executive officer with no
comparable compensation expense during the first nine months of 1995. In late
October 1996, the Company closed its New York office and eliminated certain
administrative positions which is expected to result in a reduction of
approximately $500,000 in expenses annually.
Depreciation and amortization decreased by $13,514 during the nine
months ended September 30, 1996 as compared to the same period in 1995. The
decrease is attributable to lower amortization expense as well as the result of
fewer clinics in operation during 1996. In each of 1995 and also in 1996, the
Company closed two non-performing clinics.
Interest expense increased by $75,219 for the nine months ended
September 30, 1996 respectively, as compared to the same period in 1995. The
increase is primarily the result of the Company's continued need to use its
factoring arrangements to support its operations, and to a lesser extent, higher
interest rates incurred on renegotiated term debt.
The Company's tax provision is substantially the result of accruals for
state tax on net worth for current and prior fiscal years.
As a result of the above factors, the Company incurred net losses of
$458,272 for the nine months ended September 30, 1996 as compared to net losses
of $143,575 for the same period during 1995.
Year Ended December 31, 1995 as
Compared to Year Ended December 31, 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 relating 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
(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
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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
relating 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 occurrence 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. This amount was later increased during the
year to $325,000. The settlement principally entailed the cost of employee
separation and other related costs.
Year Ended December 31, 1994 as
Compared to Year Ended December 31, 1993
Revenues increased 3.2%, or $243,306 in 1994 from 1993. This increase
was due to 1994 revenues 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 which caused increased
patient cancellations, 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.
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 the impairment
charge relates were acquired in 1993. Although patient volumes and, therefore,
revenues at these clinics
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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 obligations 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.
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 rehabilitative 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.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
The Company changed its accountants from Deloitte & Touche LLP to Price
Waterhouse LLP, effective December 28, 1994, for the audit of the Company's
financial statements for 1994. The Company's Board of Directors and its Audit
Committee approved the decision to change independent accountants.
In connection with the audits of the Company's financial statements for
its two fiscal years ended December 31, 1993 and 1992, there were no
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which, if not resolved to the satisfaction of Deloitte & Touche LLP, would have
caused Deloitte & Touche LLP to make reference to the matter in their reports
with respect to such periods.
On October 29, 1996 the Company was notified by the firm of Price
Waterhouse LLP that it was resigning from the client - auditor relationship. On
February 4, 1997 the Company appointed the firm of Federman, Lally & Remis LLC
as the Company's new independent public accountants. In connection with the
audits of the Company's financial statements for each of its two most recent
fiscal years and through October 29, 1996, there have been no disagreements with
Price Waterhouse LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Price Waterhouse LLP would
have caused them to make reference thereto in their report on the financial
statements for such years.
CURRENT DEVELOPMENTS
The Company has entered into a letter of intent for the sale of three
of its four Pennsylvania clinics for a purchase price of $1.1 million in cash
and a note, subject to adjustment. The clinics include those located in
Millersburg, PA, Mechanicsburg, PA and Shermans Dale, PA. The cash portion of
either $800,000 or $900,000 will depend on the timing of the closing of the
transaction. The buyer would also assume up to $200,000 in associated
liabilities. Pursuant to the letter of intent, the buyer has agreed to advance
certain operating expenses of the clinics proposed to be sold pending closing of
the transaction, which advances would be deducted from the cash portion of the
purchase price. The sale is subject to the buyer's due diligence, mutually
satisfactory documentation and other conditions, and there can be no assurance
that the sale will be consummated.
- 13 -
<PAGE>
PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet and
Unaudited Pro Forma Consolidated Statements of Operations give effect to the
proposed sale of three of the Company's Pennsylvania clinics pursuant to the
terms of a letter of intent between the Company and the prospective purchaser
(the "Disposition"). These Unaudited Pro Forma Consoldiated Financial Statements
have been derived from the statements of operations of the Company for the
fiscal year ended December 31, 1995 and the nine months ended September 30, 1996
included elsewhere in this Prospectus. The Unaudited Pro Forma Consolidated
Balance Sheet gives effect to the Disposition as if it had occurred on September
30, 1996. The Unaudited Pro Forma Consolidated Statements of Operations give
effect to the Disposition as if it had occurred at the beginning of each of the
periods presented.
The Unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with the notes thereto and the Company's consolidated
financial statements and related notes thereto contained elsewhere in this
Prospectus. See "Index to Financial Statements." The Unaudited Pro Forma
Consolidated Financial Statements are presented for informational purposes only
and do not purport to be indicative of the results of operations that actually
would have resulted if the Disposition had been consummated previously nor
which may result from future operations.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
ASSETS
Current assets
<S> <C> <C> <C>
Cash and cash equivalents $ 90,782 $ 800,000(1) $ 890,782
Accounts receivable, net 2,076,023 (805,167)(2) 1,270,856
Prepaid expenses and other current assets 268,099 (21,500)(3)
Notes receivable - current portion 0 26,654 26,654
----------- ----------- -----------
Total current assets 2,434,904 (13) 2,434,891
Property, plant and equipment, net 501,008 (34,763)(4) 466,245
Goodwill, net 2,447,213 0 2,447,213
Deferred charges and other assets, net 235,445 273,345(1) 508,790
----------- ----------- -----------
5,618,570 238,569 5,857,139
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable and notes payable 714,990 (110,299)(5) 604,691
Current portion long term debt 371,454 0 371,454
Accrued expenses 782,864 (89,701)(5) 693,163
----------- ----------- -----------
Total current liabilities 1,869,308 (200,000) 1,669,308
Long-term debt 1,672,151 (413,259)(2) 1,258,892
Other accrued liabilities 0 0 0
Stockholders' equity (deficiency):
Common Stock, $0.012 par value, 50,000,000 shares
authorized; Issued 16,273,500 195,282 0 195,282
Preferred stock, 10,000,000 shares authorized; 1,727,305 1,727,305 0 1,727,305
Additional paid-in capital 8,199,390 0 8,199,390
Accumulated deficit (7,957,366) 851,828(1) (7,105,538)
Less - treasury stock, 700,000 shares at cost (87,500) 0 (87,500)
----------- ----------- -----------
Total stockholders' equity (deficiency) 2,077,111 851,828 2,928,939
----------- ----------- -----------
5,618,570 238,569 5,857,139
=========== =========== ===========
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(1) Adjustments to reflect proceeds to be received by the Company from the
Disposition. The adjustments assume proceeds of $800,000 in cash and a
$300,000 note. A one-month delay in the Disposition, under certain
circumstances, would result in the Company receiving $900,000 in cash and a
$200,000 note.
(2) Adjustment to reflect the exchange of accounts receivable in satisfaction
of debt (see Note 5 to the Notes to the Unaudited Pro Forma Consolidated
Statements of Operations) and the adjustments to reflect the terms of the
Disposition.
(3) Adjustment to reflect deferred financing expense that will be incurred on
the completion of the Disposition.
(4) Adjustment to reflect the net fixed asset value of the assets to be
disposed.
(5) Adjustment to reflect debt and liabilities assumed by buyer as a result of
the Disposition.
- 14 -
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
----------------------------------------------------- ------------------------------------
Pro Forma Pro Pro Forma
Actual adjustments Forma Actual adjustments Pro Forma
------ ----------- ----- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue, net $8,617,798 $1,916,763(1) $6,701,035 $6,901,137 $1,614,032(1) $5,287,105
Cost and expenses:
Operating costs 7,244,196 1,707,506(2) 5,536,690 5,258,134 1,450,203(2) 3,807,931
Administrative and selling 1,641,099 0(3) 1,641,099 1,662,655 0(3) 1,662,655
Depreciation and
amortization 230,115 9,600(4) 220,515 175,486 7,600(4) 167,886
----------- ---------- ----------- ----------- ---------- -----------
Total operating costs 9,115,410 1,717,106 7,398,304 7,096,275 1,457,803 5,638,472
----------- ---------- ----------- ----------- ---------- -----------
Operating loss (497,612) 199,657 (697,269) (195,138) 156,229 (351,367)
Interest expense, net 183,023 31,854(4) 151,169 207,356 28,568 178,788
Other expense (income) (81,780) 0 (81,780) 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Income (loss) before taxes and
extraordinary income
(charge) (598,855) 167,803(5) (766,658) (402,494) 127,661(5) (530,155)
Provision for taxes 10,000 0(6) 10,000 55,788 0(6) 55,788
----------- ---------- ----------- ----------- ---------- -----------
Income (loss) before
extraordinary income
(charge) (608,855) 167,803 (776,658) (458,282) 127,661 (585,943)
=========== ========== =========== =========== ========== ===========
Income (loss) before
extraordinary
income (charge) per share of
common stock (0.06) (0.04)
===== ====
Average number of common
shares outstanding 13,267,333 14,787,803
========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Adjustment to eliminate actual net revenues for the periods presented
attributable to the assets to be disposed.
(2) Adjustment to eliminate actual and accrued expenses of the disposition
portion of the business relating to actual direct expenses which consist
principally of salaries, wages, fringe benefits and other clinical costs of
the operations during the period being presented.
(3) Assumes no reduction in the Company's administrative and selling expenses
resulting from the Disposition.
(4) Adjustment to eliminate actual depreciation expense for the periods
presented attributable to the assets to be disposed.
(5) In January 1996, the Company satisfied a note payable in the amount of
$413,000 incurred in the acquisition of the assets to be disposed, by
exchanging $484,000 of the then outstanding gross receivables attributable
to those assets in full satisfaction of the obligation. (The net
collectable accounts involved in the exchange on a pro forma basis are
approximately $2,500 less than the balance of the note payable, which is
not included in the pro forma adjustments.) The pro forma adjustment
eliminates actual and accrued interest expense attributable to the assets
to be disposed. Lower interest expense resulting from the use of proceeds
of the Disposition to reduce the Company's outstanding debt is not
reflected in the pro forma adjustments.
(6) Excludes extraordinary income resulting from the gain on the sale of the
Disposition. Accordingly, the pro forma adjustments do not assume any
change in Federal and state income tax.
- 15 -
<PAGE>
BUSINESS
The Company provides outpatient rehabilitation services through a
network of outpatient clinics principally in the Northeast and Mid-Atlantic
regions. The Company owns and operates thirteen clinics, five 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.
In 1992, following the Company's initial public offering, the Company
operated nine facilities. In 1993, the Company acquired nine additional
facilities. The Company returned one clinic to its seller in 1995 and closed two
clinics in each of 1995 and 1996 that were not achieving desired results..
In 1996, the Company began development of a program of managed
rehabilitation services ("MRS"), pursuant to which the Company would furnish
contract development, staffing, administrative, payroll, billing, collection and
management services to local, independently owned host clinics and agencies,
that in turn would provide or coordinate the actual rehabilitative therapy
services. The Company expects that over time the MRS business will become a
substantial focus of the Company's operations, although the Company as yet has
not entered into any MRS arrangements with host providers.
INDUSTRY BACKGROUND
Physical and occupational therapy is the process of aiding in the
restoration of individuals disabled by injury or 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.
OUTPATIENT REHABILITATION SERVICES
The clinics provide pre- and post-operative care and treatment for a
variety of orthopedic-related disorders and 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.
- 16 -
<PAGE>
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.
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.
MARKETING
At each clinical location, the Company focuses its marketing efforts on
physicians, mainly orthopedic surgeons, neurosurgeons, physiatrists,
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 referral 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.
Twelve 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 providers's "reasonable costs" as allowed under Medicare
regulations or the providers'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. 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 the 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.
The following table sets forth the Company Percentage Revenues by
category of payor for the fiscal years 1994, 1995, and 1996.
Sources of Revenue/Reimbursement 1994 1995 1996
Workers Compensation 25% 10% 28%
Health Maintenance Organizations 10% 13% 25%
Motor Vehicle Insurance 9% 6% 18%
Medicare 7% 5% 8%
Commercial Health Insurance 17% 39% 7%
Blue Cross/Blue Shield 7% 5% 5%
Self Pay 9% 7% 4%
Other 14% 12% 3%
Medicaid 2% 3% 2%
--- --- ---
Total 100% 100% 100%
- 17 -
<PAGE>
CONTRACT SERVICES DIVISION
The Company's Contract Services Division provides temporary physical,
occupational and speech therapist staffing, typically under intermediate term
contracts, to schools, hospitals, nursing homes, assisted living facilities and
home health care companies. In addition to hiring therapists locally, the
staffing division has established international sources of highly trained duly
licensed therapists who may provide services in the United States. Using these
relationships, the staffing division has been able to attract a growing supply
of staff at hourly rates below current market rates. The staffing division has
grown rapidly since its formation in September 1994. The temporary staffing
industry has experienced dramatic growth over the last decade.
MANAGED REHABILITATION SERVICES
The Company has begun development of a program of managed
rehabilitation services ("MRS"), pursuant to which the Company would enter into
licensing arrangements with local, independently owned host providers of
rehabilitative therapy ("hosts"), such as outpatient clinics, small contract
agencies and independent home care agencies. Under these arrangements, the hosts
would be the actual provider or coordinator of rehabilitative therapy services,
while the Company would furnish the hosts with contract development and
management services.
The Company believes that HMOs and other managed care payers are
increasingly seeking providers that can deliver multiple services in diverse
settings and locations. Under the MRS program, the Company would assist its
licensed hosts to develop a full range of rehabilitative therapies, including
physical, occupational, speech and respiratory services, and delivery of these
services both in clinic settings and at hospitals, sub-acute care facilities,
schools, homes and assisted living residences. Through its contractual
relationships with managed care payers, the Company would direct contracts with
such payers to its host licensees. The Company would also furnish the hosts with
administrative, payroll, billing and collection services, assist the hosts with
staffing on an as-requested basis and advise the hosts on contract management.
For example, based upon experience in the Company's own clinics and contract
services division, the Company would advise hosts on mix design--establishing an
optimal balance between therapists and lesser paid therapist assistants--and
employment of underutilized clinic staff to perform therapy at off-site
locations. Only one host would be licensed in any given locality, but multiple
hosts could participate in contracts arranged by the Company with regional or
national managed care payers.
The MRS model would benefit the hosts by offering contract
opportunities that otherwise would likely not be available to them and relieving
them of complex and costly administrative burdens. The model would benefit the
Company by leveraging off expertise developed in the Company's clinics and
contract services operations and expanding the Company's operations into new
regional markets with relatively modest capital outlays. The Company would be
compensated by the hosts through direct payment for certain services and profit
participation in the hosts' businesses.
The Company expects that over time the MRS business will become a
substantial focus of the Company's operations. However, although potential hosts
for the MRS business have been identified, the Company as yet has not entered
into any MRS licensing arrangements.
REGULATION
The health care industry is subject to numerous federal, state and
local regulations. Although many states prohibit commercial enterprises from
engaging in the corporate practice of medicine, the states in which the Company
currently operates do not prohibit the Company from providing physical therapy
services. 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 is 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. In
addition, the Company could be subject to fines and penalties. In addition, 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 reduce
profitability.
- 18 -
<PAGE>
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.
Twelve of the Company's clinics are certified Medicare providers. In
order to receive Medicare reimbursement, a clinic must meet the applicable
conditions or 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) and or imprisonment for up to five years. 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
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 an interpretive letter
from 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" was expanded
in 1993 to impose 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 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 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 its 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.
- 19-
<PAGE>
COMPETITION
The health care industry generally and the physical and occupational
business in particular are highly competitive and subject to continual changes
in the manner 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 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.
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 five year lease expiring
January 2002. In addition, the Company currently operates thirteen 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.
Set forth below is certain information concerning the Company's
outpatient facilities as of September 30, 1996.
Outpatient Rehabilitation Facilities
LOCATION SQ. FT. YEAR OPENED
Attleboro, MA 2,800 1971
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 1,875 1992
EMPLOYEES
As of December 31, 1996, the Company employed 160 full and part-time
persons, 113 of whom are licensed therapists, assistants and aides at the
Company's outpatient facilities, 28 of whom function in administrative
capacities at such outpatient facilities and 19 of whom are employed in the
Company's executive office. 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
- 20 -
<PAGE>
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.
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.
MANAGEMENT
NAME AGE POSITION
James Kenney 53 Chairman of the Board(1)(3)
Robert M. Whitty 40 President
Joel Friedman 55 Director(1)
Sidney Dworkin 74 Director(2)
Paul W. Frankel, M.D., Ph.D. 47 Director(1)(3)
Goodhue W. Smith, III 46 Director(1)(2)
Raymond L. LeBlanc 40 Treasurer, Secretary and
Chief Financial Officer
- --------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of Compensation Committee
JAMES KENNEY became a director in March 1993 and Chairman of the Board
of Directors on November 1, 1996. 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 provides third-party financial and business research. 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.
JOEL FRIEDMAN, became a director of the Company in December 1991. He
was Chairman and Chief Executive Officer from July 1994 to June of 1996. Mr.
Friedman 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. and Founders Capital Corporation. Mr. Friedman is also a
member or the Board of Directors of 3D Geophysical, Inc.
ROBERT M. WHITTY was elected President in November 1995. Mr. Whitty has
been a vice president of the Company since 1994. 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 18 years of experience in the health care
field.
PAUL W. FRANKEL, M.D., PH.D., has been a member of the Board of
Directors since July 1994. Dr. Frankel is currently, and has been since August
1993, 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 National Medical Director.
- 21 -
<PAGE>
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 has since such time served 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 and 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 data 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.
RAYMOND L. LEBLANC has been Controller of the Company since March 1996,
Treasurer and Chief Financial Officer since June 1996, and Secretary since
November 1, 1996. Previously, since 1987, Mr. LeBlanc was Treasurer of Luzo
Foodservice Corporation, a food manufacturer, retailer and distributor.
Renaissance Capital Partners II Ltd. ("Renaissance") is currently
entitled to designate two directors for nomination to the Company's Board of
Directors, including a director that it is entitled to designate as the holder
of a majority of the Company's Series A Preferred Stock (See "Descritption of
Securities -- Preferred Stock -- Series A Preferred Stock"). 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 met once during the Company's last fiscal
year. This committee recommends to the Board of Directors a firm of independent
accountants to audit the books and accounts of the Company. The Committee
reviews the reports prepared by the independent accountants and recommends to
the Board any actions deemed appropriate in connection with the reports. The
Executive Committee of the Board of Directors of the Company was formed in 1995
to take such action and carry out such duties and responsibilities as may be
undertaken, in the discretion of such Committee, by the Board of Directors.
During 1995, this committee met once. The Board of Directors has no standing
nomination 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
and Stock Option Plan. The non-employee directors were entitled to receive
directors fees in the amount of $500 per meeting throughout 1995 although no
fees were paid during the year.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth, for the three
fiscal years ended December 31, 1996, the cash compensation of each Executive
Officer of the Company whose total salary and bonuses exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
================================================================================================================================
Name and Principal Year Salary Bonus Other Annual Restricted Options/ LTIP Payouts All Other
Position Compensation Stock SARs Compen-
Awards sations
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joel Friedman, 1996 $53,366 0 0 0 787,667(4) 0 0
Chairman of the 1995 75,000 0 0 0 0 0 0
Board and Chief 1994 0 0 0 0 1,250,000 0 0
Executive Officer(1)
- --------------------------------------------------------------------------------------------------------------------------------
Alan Mantell 1995 $120,000 0 0 0 787,667(4) 0 0
Chief Executive
Officer(2)
- --------------------------------------------------------------------------------------------------------------------------------
Robert W. Whitty, 1996 $140,000 0 0 0 781,666 0 0
President(3) 1995 106,000 0 0 0 0 0 0
================================================================================================================================
</TABLE>
(1) Joel Friedman was Chief Executive Officer of the Company from July 1994 to
June 1, 1996.
(2) Mr. Mantell was Chief Executive Officer of the Company from June 1996
through November 1996.
(3) Mr. Whitty was elected President of the Company in November 1995.
(4) Options to acquire 500,000 shares awarded to each of Messrs. Friedman and
Mantell expired unexercised upon termination of employment in November
1996.
- 22 -
<PAGE>
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 in 1995 by any
executive officers included in the above table did not exceed 10% of such
person's 1995 cash compensation.
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 of the employee. Types of awards include non-statutory stock
options, incentive options (qualifying under Section 422 A 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 1996, nor were any options exercised by the individuals
named in the Summary Compensation Table during 1996.
1994 Stock Option Plan
The Company adopted the 1994 Stock Option Plan (the "1994 Plan")
effective November 3, 1994. The terms and conditions of the 1994 Plan are
substantially identical to the 1989 Plan, except that the 1994 Plan does not
provide for granting of SAR's. In September 1996, the Company accepted the
surrender of options to acquire 833,333 shares under the 1994 Plan and issued
options to acquire 2,250,000 shares, as set forth in the table below. Options to
acquire 1,000,000 shares granted in September 1996 expired unexercised in
November 1996. As of December 31, 1996, options to acquire 1,449,999 were
available for grant under the 1994 Plan.
The following table sets forth information concerning grants of options
by the Company in 1996:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percentage of Exercise
Number of Total or
Securities Options Base
Underlying Granted to Price
Options Employees per Expiration
Name Granted in Fiscal Year Share Date
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
37,667 $.28 2/01/01
J. Friedman 750,000(1) 34% .38 9/01/06
- --------------------------------------------------------------------------------------------------------------
37,667 .28 2/01/01
A. Mantell 750,000(1) 34% .38 9/01/06
- --------------------------------------------------------------------------------------------------------------
31,666 .28 2/01/01
M. Whitty 750,000(1) 32% .38 9/01/06
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------
(1) Granted under the 1994 Plan. Of the 750,000 options granted, 250,000 vested
immediately and the remaining 500,000 were to vest as determined by the Board of
Directors. The unvested options of Messrs. Friedman and Mantell expired
unexercised upon their termination of employment with the Company in November
1996.
- 23 -
<PAGE>
The following table sets forth information concerning any exercise of
stock options during the Company's fiscal year ended December 31, 1996 by the
Named Executive Officers, 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, 1996:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-money Options at
Options Held at 12/31/96 December 31, 1996(1)
=================================================================================================================================
Shares Value Exercisable Unexercisable Exercisable Unexercisable
Acquired on Realized
Exercise
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Friedman 35,714 $3,571 251,912 0 $191 --
- ---------------------------------------------------------------------------------------------------------------------------------
A. Mantell 0 0 287,666 0 3,766 --
- ---------------------------------------------------------------------------------------------------------------------------------
R.M. Whitty 0 0 281,666 500,000 3,166 0
=================================================================================================================================
</TABLE>
(1) Based on the average bid and ask price on the NASDAQ Small-Cap Market of
the Company's common stock on that date ($0.38).
Compensation of Directors
Non-employee directors are entitled to receive $500 per meeting of the
Board of Directors attended, which fees were waived during 1996. In September
1996, the Board of Directors made stock awards to its outside directors at a
rate of 25,000 shares for each year of service since 1993. Pursuant to such
awards, Messrs. Kenney, Frankel, Smith, and Dworkin received 100,000 shares,
100,000 shares, 75,000 shares and 25,000 shares respectively .
Under the Company's stock option plans, directors who are not employees
of the Company (other than directors who are members of the Stock Option
Committee of the particular plan) are eligible to be granted non-qualified
options under such plan. The Board of Directors or the Stock Option Committee
(the "Committee") of each plan, as the case may be, has discretion to determine
the number of shares subject to each nonqualified option (subject to the number
of shares available for grant under the particular plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are employees of the Company (but not members of the
Committee of the particular plan) are eligible to be granted incentive stock
options under such plans. The Board or Committee of each plan, as the case may
be, also has discretion to determine the number of shares subject to each
incentive stock option ("ISO"), the exercise price and other terms and
conditions thereof, but their discretion as to the exercise price, the term of
each ISO and the number of ISOs that may vest in any year is limited by the
Internal Revenue Code of 1986, as amended.
PRINCIPAL STOCKHOLDERS
The following table sets forth information at December 31, 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, (iii) each named executive
- 24 -
<PAGE>
officer, and (iv) 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.
<TABLE>
<CAPTION>
===================================================================================================
Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Renaissance Capital Partners II, Ltd. 9,257,211/1/ 47.1%
8080 N. Central Expwy.
Suite 210-LB 59
Dallas, TX 75206
- ---------------------------------------------------------------------------------------------------
Joel Friedman 564,434/2/ 3.6%
- ---------------------------------------------------------------------------------------------------
Sidney Dworkin 466,951/3/ 2.9%
- ---------------------------------------------------------------------------------------------------
James Kenney 170,000/4/ 1.1%
- ---------------------------------------------------------------------------------------------------
Dr. Paul Frankel 170,000/5/ 1.1%
- ---------------------------------------------------------------------------------------------------
Goodhue W. Smith, III 112,000/6/ less than 1%
- ---------------------------------------------------------------------------------------------------
Robert M. Whitty 281,666/7/ 1.8%
- ---------------------------------------------------------------------------------------------------
Alan Mantell 296,667/8/ 1.9%
- ---------------------------------------------------------------------------------------------------
All executive officers and directors as a 1,927,259/9/ 11.6%
group (7 persons)
===================================================================================================
</TABLE>
/1/ Includes the right to acquire 4,098,217 shares issuable upon conversion of
outstanding Series A Preferred Stock and Series B Preferred Stock.
/2/ Includes 251,912 shares subject to currently exercisable stock options and
the right to acquire 27,475 shares upon conversion of Series A Preferred
Stock. Also includes 98,903 shares of Common Stock owned by Mr. Friedman's
children or which Mr. Friedman's children have the right to acquire upon
conversion of shares of Series A Preferred Stock as to which Mr. Friedman
disclaims beneficial ownership.
/3/ Includes 160,000 shares issuable upon a conversion of a convertible
promissory note, 50,000 shares issuable upon exercise of warrants. Also
includes 40,000 shares owned by a partnership of which Mr. Dworkin is a
partner, 80,000 shares issuable upon conversion of a promissory note held
by such partnership and 25,000 shares issuable upon exercise of warrants
held by such partnership.
/4/ Includes 70,000 shares subject to currently exercisable stock options.
/5/ Includes 20,000 shares subject to currently exercisable stock options.
/6/ Includes 20,000 shares subject to currently exercisable stock options. Does
not include 15,000 shares owned by Duncan-Smith Co., of which Mr. Smith is
an officer.
/7/ Consists of currently exercisable stock options.
/8/ Includes currently exercisable stock options to acquire 287,667 shares.
/9/ Includes 643,618 shares subject to currently exercisable non-qualified
stock options, the right to acquire 54,950 shares upon conversion of
outstanding Series A Preferred Stock, 75,000 shares issuable upon exercise
of warrants, and 240,000 shares issuable upon the conversion of convertible
notes.
- 25 -
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective June 30, 1994, certain holders of the Company's convertible
debt, converted certain promissory notes from the Company 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 at any time, at
the option of the holder thereof, into Common Stock at a conversion
price of $.57 per share of Common Stock, subject to adjustment, on the
basis of the par value of the Series A Preferred Stock of $1.00 per
share. See "Description of Securities -- Preferred Stock -- Series A
Preferred Stock."
Joel Friedman (the Company's former Chairman and Chief Executive
Officer): 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. Mr. Friedman's children collectively
converted an identical amount of debt and accrued interest on
identical terms.
Christopher Harkins (the Company's former President): Convertible
debt and accrued interest of $25,688 was converted into 51,375 shares
of Common Stock of the Company.
Diedre Benson (see below): Convertible debt and accrued interest of
$555,722 was converted into 1,111,444 shares of Common Stock 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 an
aggregate of 2,500,000 shares of Common Stock owned by 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 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 Commons Stock for $.50 per
share for a period of three years. The Company also agreed to provide Mr. Benson
with other benefits, including the payment of health, life and disability
insurance costs through November 1996 and certain expenses in connection with
the negotiation of the Termination Agreement. Mr. Benson and Mrs. Benson 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 into
Common Stock at a conversion price of $0.33 per share. 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, into Common Stock at
a conversion price of $0.25 per share, subject to adjustment, on the basis of
the par value of the Series B Preferred Stock of $1.00 per share. See
"Description of Securities -- Preferred Stock --Series B Preferred 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.
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 of
1,500,000 additional shares of Common Stock 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. 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, 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 $0.75 per share. In August 1995,
Mr. Dworkin exchanged the note for 80,000 shares of Common Stock and a
convertible promissory note in the principal amount of $80,000. 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 $0.75 per share. In August, 1995, the note was exchanged for 40,000 shares
of Common Stock and a convertible promissory note in the amount of $40,000.
- 26 -
<PAGE>
In November 1995, Joel Friedman, then the Chairman and Chief Executive
of the Company, and Robert M. Whitty, the President of the Company, jointly and
severally guaranteed those accounts receivable of the Company that were pledged
to Capital Factors, Inc., a lender to the Company. The amount of the line of
credit secured by the Company's accounts receivable is $500,000. In January
1996, additional guarantees were provided by Messrs. Friedman and Whitty in
connection with an additional line of credit secured by receivables in the
amount of $750,000. Subsequent to Mr. Friedman resignation on November 1, 1996
as the Company's Chairman and as an officer of the Company, Mr. Friedman's
guarantees were released.
At the end of December 1995, Joel Friedman and Alan Mantell, then Chief
Operating Officer of the Company, each loaned the Company $30,000 to fund
certain obligations of the Company. The loans were repaid at the beginning of
January 1996.
In April of 1996, the Company executed a promissory note in favor of
Renaissance in connection with a $500,000 line of credit. Pursuant to the
promissory note, the Company is obligated to pay interest on the unpaid monthly
balance of the line of credit at the rate of 10% per annum, computed in arrears,
with the entire principal balance plus any unpaid interest due in full on April
17, 1999. As of December 31, 1996, $340,000 had been advanced to the Company
under these arrangements. Of this amount, $265,000 was loaned by Renaissance,
and the balance by the following persons participating in the loan: Alan
Mantell, $15,000; Joel Friedman, $15,000; Goodhue Smith, a member of the Board
of Directors, $20,000; and Duncan-Smith Co., an entity affiliated with Mr.
Smith, $25,000. In September and December 1996, the Company issued to
Renaissance and the other participants in the Renaissance credit line shares of
Common Stock in consideration of their loans to the Company, as follows:
Renaissance, 159,000 shares; Mr. Mantell, 9,000 shares; Mr. Friedman, 9,000
shares; Mr. Smith, 12,000 shares; and Duncan-Smith Co., 15,000 shares.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.012 par value per share and 10,000,000 shares of Preferred Stock, $1.00 par
value per share. As December 31, 1996, there were 15,573,535 shares of Common
Stock outstanding and 1,227,305 shares of Series A Preferred Stock and 500,000
shares of Series B Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having liquidation preference over the Common Stock.
Holders of shares of Common Stock, as such, have no conversion, preemptive or
other subscription rights, and there are no redemption or sinking fund
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby, when issued
against the consideration therefor, will be, fully paid and nonassessable.
Reverse Stock Split
At the Company's 1996 Annual Meeting, stockholders approved an
amendment to the Company's charter pursuant to which the Board of Directors is
authorized, without further action by stockholders, to effect a reverse split of
the Common Stock at a rate of one share of new Common Stock for a whole number
of shares of existing Common Stock of between two and ten, in the discretion of
the Board of Directors. If a reverse stock split were effected, the exercise or
conversion rate of the Company's outstanding convertible preferred stock,
convertible notes, options and warrants would be appropriately adjusted. The
Board of Directors has not yet made a determination to effect such reverse stock
split or, if effected, the rate of the reverse split.
PREFERRED STOCK
The Company is authorized to issue preferred stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance,
- 27 -
<PAGE>
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company. The
Company has no present intention to issue any additional shares of its preferred
stock. See "Certain Relationships and Related Transactions."
Pursuant to the foregoing authority, the Board of Directors of the
Company has designated a Series A Preferred Stock and a Series B Preferred
Stock. The following discussion of the terms of the Series A Preferred Stock and
Series B Preferred Stock is qualified in its entirety by reference to the
Certificate of Designation of Preferred Stock relating thereto which is filed as
an exhibit to the registration statement of which this Prospectus forms a part.
Series A Preferred Stock
There are authorized and outstanding 1,227,305 shares of the Company's
Series A Preferred Stock, par value $1.00 per share.
Conversion. Each share of Series A Preferred Stock is convertible at
any anytime, at the option of the holder, into the number of shares of Common
Stock obtained by dividing $1.00 by the conversion price then in effect. The
conversion price was originally $.75 per share. If and whenever the Company
issues shares of Common Stock (except shares issued pursuant to options and/or
shares under the Company's profit sharing plan) for consideration less than the
conversion price, the conversion price is reduced to the per share consideration
received by the Company in respect of any such issuance. If the Company issues
shares of Common Stock without consideration, the conversion price is reduced
such that a holder of Series A Preferred Stock will have the right to convert
such stock into the same percentage of the outstanding Common Stock as such
holder would have held had its Series A Preferred Stock been converted just
prior to such issuance. If the Company issues shares of Common Stock for
property other than cash, the amount of the consideration deemed received by the
Company for purposes of these provisions is the fair market value of such
property.
The Company has issued Common Stock below the initial conversion price
of the Series A Preferred Stock. The holders of the Series A Preferred Stock
have agreed, as of December 1, 1996, that the conversion price of the Series A
Preferred Stock will be $0.57, notwithstanding that, by the terms of the Series
A Preferred Stock, the issuance of Common Stock by the Company should have
resulted in a lower conversion price. Such agreement does not constitute a
waiver of the rights of the holders of Series A Preferred Stock in respect of
any future issuances of Common Stock.
In the case of any capital reorganization, reclassification of the
stock of the Company, consolidation or merger or sale, exchange, lease, transfer
or other disposition of all or substantially all of the property and assets of
the Company, or the participation by the Company in a share exchange as the
company to be acquired, the Series A Preferred Stock will be convertible into
the kind and number of shares of stock or other securities or property to which
the holder of such shares would have been entitled to receive had the holder
converted such shares into Common Stock immediately prior to the event.
Mandatory Conversion. In the event the Company raises at least $1.5
million of equity at a price per share equal to or greater than the conversion
price, the holders of the Series A Preferred Stock, upon notice by the Company,
will be required to convert all shares of Series A Preferred Stock into Common
Stock.
Registration Rights. The holders of the Series A Preferred Stock have
certain rights to demand registration under the Securities Act and to
participate in the registration by the Company of its capital stock for its own
account or for the account of its security holders.
Board Representation. The holders of a majority of the Series A
Preferred Stock outstanding have the right, at their option, to designate one
director of the Company.
Redemption. The Company has the right to redeem the Series A Preferred
Stock, in whole or in part, at par value, on 30 days notice to each holder of
such stock. Such redemption may not be sooner than 30 days nor later than 120
days following the filing with the Commission of the Company's most recent
annual report on Form 10-K. In the event that less than all shares of Series A
Preferred Stock are to be redeemed, such redemption will be pro rata among the
holders such stock. If the Series A Preferred Stock is called for redemption,
the right to convert such Series A Preferred Stock expires on the redemption
date.
Financial Limitation. The Company may not issue any additional
preferred stock senior in priority of liquidation to the Series A Preferred
Stock without the prior written approval of the holders of at least 50% of the
outstanding Series A Preferred Stock.
- 28 -
<PAGE>
Dividends. The Company is required to pay quarterly dividends on the
Series A Preferred Stock at a rate of 6% per annum. Such dividends are
cumulative, with interest payable on unpaid dividends. No such dividends have as
yet been declared or paid.
Voting. Except as required by law or as specified in the Certificate of
Designations, the holders of Series A Preferred Stock have no voting rights.
Series B Preferred Stock
There are authorized and outstanding 500,000 shares of Series B
Preferred Stock, par value $1.00 per share. The terms of the Series B Preferred
Stock are the same as the terms of the Series A Preferred Stock, except as
follows.
Conversion. The initial conversion price of the Series B Preferred
Stock was $0.33. The Company has issued Common Stock below the initial
conversion price. The holder of the Series B Preferred Stock has agreed, as of
December 1, 1996, that the conversion prices of the Series B Preferred Stock
will be $0.25, notwithstanding that, by the terms of the Series B Preferred
Stock, the issuance of Common Stock by the Company should have resulted in a
lower conversion price. Such agreement does not constitute a waiver of the
rights of the holder of the Series B Preferred Stock in respect of any future
issuance of Common Stock.
Mandatory Conversion. In the event the Company raises at least $1.5
million of equity at a price per share equal to or greater than $0.75, the
holders of the Series B Preferred Stock, upon notice by the Company, will be
required to convert all shares of Series B Preferred Stock into Common Stock.
The Company's right to mandatory conversion under these provisions expires on
December 31, 1996.
Board Representation. The holders of the Series B Preferred Stock have
no right to designate a director.
Liquidation. In the event of a voluntary or involuntary liquidation,
dissolution of winding up of the Company, the holders of the Series B Preferred
Stock are entitled to receive out of the assets of the Company an amount per
share equal to the par value of such shares, plus any accrued and unpaid
dividends, before any payment is made or assets distributed to the holders of
Common Stock.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
- 29 -
<PAGE>
SELLING STOCKHOLDERS
An aggregate of 300,000 shares of Common Stock issuable upon the
exercise of Bridge Warrants may be offered and sold pursuant to this Prospectus
by certain of the selling stockholders who receive Bridge Warrants in connection
with the Bridge Financing. In addition, up to 533,333 shares of Common Stock
issuable upon exercise of Rights, up to 5,217,164 shares of Common Stock
acquired by certain Selling Stockholders from the Company or from a stockholder
of the Company in private transactions and up to 296,520 shares of Common Stock
issuable upon conversion of the Convertible Note may be offered by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Stockholders.
The following table sets forth certain information with respect to the
Selling Stockholders:
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP OF SHARES
SHARES OF BENEFICIALLY
COMMON STOCK SHARES TO BE SOLD IN OWNED AFTER
SELLING STOCKHOLDER PRIOR TO SALE THE OFFERING THE OFFERING(1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Akst, Hymie 80,000(2) 80,000(2) 0
Atkins, Davit T., DDS 23,255 23,255 0
Berke, Leonard 170,000 170,000 0
Bovers, Howard F. 50,000(3) 50,000(3) 0
Bushey, Michael 50,000 50,000 0
Calcagno, Ann 10,000 10,000 0
Cohen, Phyllis J. 25,000 25,000 0
Dalessio, Anthony & Marilyn 17,000 17,000 0
Danzansky, Richard & Carolyn 50,000 50,000 0
Davies, Irving 100,000 100,000 0
Dworkin, Doris & Eliot 70,000 70,000 0
Dworkin, Sidney 321,951(4) 161,951(5) 160,000
Falkner, Edward R. 60,000 60,000 0
Frankel, Paul W. MD 170,000(6) 150,000 20,000
Friedman, Joel 564,434(7) 177,144 387,290
Gershman, Melvin Y. 216,279 216,279 0
Goldfarb, James M. & Ronda 25,000 25,000 0
G&S Metal Products Co., Inc. 450,000(8) 450,000(8) 0
Goldstein, Arthur 200,000 200,000 0
Gottesman, Robert G. 100,000 100,000 0
Goulder, Morton E. 50,000 50,000 0
Hankin, Joseph N. 10,000 10,000 0
Harkins, Christopher 25,000 25,000 0
Hast, David & Edele 30,000 30,000 0
- 30 -
<PAGE>
Heiser, Marian 58,139 58,139 0
Hoover, Sally 261,111(9) 261,111(9) 0
Jakhotia, Rashmi & Ramchandra 25,000 25,000 0
Joshi, Vinod S. & Manju 6,400 6,400 0
Kaplan, Lee 5,000 5,000 0
Kenney, James 170,000(10) 100,000(10) 70,000
Kogod, Martin 261,279(11) 181,279(12) 80,000
Kramer, Julius 20,000 20,000 0
Krause, Elizabeth A. 20,000 20,000 0
Lewis, Roger F. 25,000 25,000 0
McLaughlin, Ann 100,000 100,000 0
Medical Resources Contract 210,400 210,400 0
Services, Inc.
MDA Financial, Inc. 50,000(13) 50,000(13) 0
Michel, Beno 25,000 25,000 0
Nadel, Renee 25,000 25,000 0
Revocable Trust
Perlman, Jerold M., MD 10,000 10,000 0
Polly, Harriet 120,000 120,000 0
Polly, Harvey 100,000 100,000
Reichle, Kenneth M., Jr. 281,279(14) 241,279(15) 40,000
Richter, Gerald 58,139 58,139 0
Rosin, Robert M. 50,000 50,000 0
Ryan, Cornelius 100,000 100,000 0
Scarvilli, Victor J. 30,000 30,000 0
Schiller, Philip J. 30,000 30,000 0
Schiller, Suzanne 60,000 60,000 0
Schoke, James A. 150,000 150,000 0
Schwartz, Harry 116,279 116,279 0
Shapiro E. Donald 162,500(16) 162,500(16) 0
Sidelmar 145,000(17) 65,000(18) 80,000
Siegel, Roger P. (R&J Trust) 60,000 60,000 0
Silver, Daniel K. 100,000 100,000 0
Smith III, Goodhue 112,000(19) 80,000(19) 32,000
Strategic Growth International 150,000(20) 150,000(20) 0
- 31 -
<PAGE>
Szekely, Laszio and Edith 10,000 10,000 0
Tribbitt, Richard and Vicky 120,000 120,000 0
Van Wijck, Bert 745,862(21) 745,862(21) 0
Wood, Wesley 50,000 50,000 0
Zimmerman, Oscar 25,000 25,000 0
</TABLE>
(1) Assumes all of the shares offered hereby are sold by the Selling
Stockholders.
(2) Includes 25,000 shares issuable upon exercise of warrants.
(3) Consists of 50,000 shares issuable upon exercise of warrants.
(4) Includes 160,000 shares issuable upon conversion of convertible promissory
notes, and 50,000 shares issuable upon exercise of warrants . Does not
include shares beneficially owned by Sidelmar, a partnership in which Mr.
Dworkin is a partner.
(5) Includes 50,000 shares issuable upon exercise of warrants.
(6) Includes 20,000 shares subject to currently exercisable options.
(7) Includes 251,912 shares subject to currently exercisable options and the
right to acquire 27,475 shares upon conversion of Series A Preferred Stock.
Also includes 98,903 shares beneficially owned by Mr. Friedman's children
on which Mr. Friedman's children have the right to acquire upon conversion
of shares of Series A Preferred Stock, as to which he disclaims beneficial
ownership.
(8) Includes 50,000 shares issuable upon exercise of warrants.
(9) Includes 83,333 shares issuable upon exercise of options.
(10) Includes 70,000 shares subject of currently exercisable options.
(11) Includes 80,000 shares issuable upon conversion of convertible promissory
notes and 25,000 shares issuable upon exercise of warrants.
(12) Includes 25,000 shares issuable upon exercise of warrants.
(13) Consists of 50,000 shares issuable upon exercise of warrants.
(14) Includes 40,000 shares issuable upon conversion of convertible promissory
notes and 12,500 shares issuable upon exercise of warrants.
(15) Includes 12,500 shares issuable upon exercise of warrants.
- 32 -
<PAGE>
(16) Includes 12,500 shares issuable upon exercise of warrants.
(17) Includes 80,000 shares issuable upon conversion of convertible promissory
notes and 25,000 shares issuable upon exercise of warrants.
(18) Includes 25,000 shares issuable upon exercise of warrants.
(19) Includes 20,000 shares subject to currently exercisable options. Does not
include 15,000 shares owned by Duncan-Smith Co., of which Mr. Smith is an
officer.
(20) Consists of 150,000 shares issuable upon exercise of warrants.
(21) Includes 296,520 shares issuable upon exercise of the Convertible Note.
Joel Friedman has been a director of the Company since December 1991,
was Chairman of the Board of Directors from July 1994 through November 1, 1996
and was Chief Executive Officer of the Company from July 1994 to June 1, 1996.
Christopher Harkins was President of the Company from December 1990 through
November 1995. Sidney Dworkin has been a director of the Company since March
1996. Dr. Paul W. Frankel has been a director of the Company since July 1994.
Mr. Goodhue Smith III has been a director of the Company since July 1994. James
Kenney has been a director of the Company since March 1993.
PLAN OF DISTRIBUTION
The Common Stock held by the Selling Stockholders and the Common Stock
issuable to the Selling Stockholders upon exercise of the Rights and conversion
of the Convertible Note may be offered and sold from time to time as market
conditions permit in the over-the-counter market, or otherwise, at prices and
terms then prevailing or at prices related to the then-current market price, or
in negotiated transactions. The shares offered hereby may be sold by one or more
of the following methods, without limitation: (a) a block trade in which a
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus; (c)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (d) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
Such broker or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company by Bible, Haney, Hoy, Trachok, Wadhams & Woloson.
EXPERTS
The financial statements as of December 31, 1995 and 1994, and for each
of the two years in the period ended December 31, 1995 included in this
prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. (the "Commission") a registration statement on Form SB-2 (the
"Registration Statement"), under the Securities Act with respect to the shares
of Common Stock offered by this Prospectus. This Prospectus, filed as part of
such Registration Statement, does not contain all of the information set forth
in, or annexed as exhibits, to, the Registration Statement, certain portions of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and this
- 33 -
<PAGE>
offering, reference is made to the Registration Statement, including the
exhibits filed therewith, which may be inspected without charge at the Office of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at its principal
office upon payment of prescribed fees. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete and, where the contract or other document has been filed as an exhibit
to the Registration Statement, each statement is qualified in all respects by
reference to the applicable document filed with the Commission.
- 34 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated Health Care Associates, Inc.
Audited Financial Statements:
Independent Auditors' Report F-2
Consolidated statements and notes as of December 31, 1995
and 1994 and for the years then ended:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-15
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets -- September 30, 1996 F-17
and December 31, 1995
Condensed Consolidated Statements of Operations --
Nine Months ended September 30, 1996 and 1995 F-18
Condensed Consolidated Statements of Cash Flows --
Nine Months ended September 30, 1996 and 1995 F-19
Notes to Condensed Consolidated Financial Statements F-20
F-1
<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 F-3 through F-15 present fairly, in all material respects, the financial
position of Consolidated Health Care Associates, 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.
Price Waterhouse LLP
Providence, RI
April 5, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS: 1995 1994
------ ---- ----
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 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
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------
F-3
<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
----------- -----------
Cost 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)
============ ===========
</TABLE>
- -------------------------------------------------------------------------------
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------
F-4
<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)
======== ========== ======== ========== ===========
</TABLE>
- -------------------------------------------------------------------------------
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------
F-5
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
- -------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($608,855) ($4,581,929)
Adjustments to reconcile net cash from operating activities:
Depreciation 156,000 296,948
Amortization 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 other assets 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 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 by (used for) 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>
F-6
<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 totaled $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 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).
Incomes Taxes
Incomes 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.
F-7
<PAGE>
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 operation 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.
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.
F-8
<PAGE>
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.
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
========== ============
- --------------------------------------------------------------------------------
F-9
<PAGE>
4. REVENUE, NET
Revenue is reported net of allowances as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Revenue $11,659,001 $11,420,040
Allowances for contractual (3,041,203) (3,623,065)
and other adjustments ----------- -----------
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 $71,250, to the Company's
401(k) 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 401(k) plan.
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
-------------------------------------------------
F-10
<PAGE>
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Convertible promissory notes (convertible into 537,105, shares of CHCA common stock) $900,858 $999,559
with interest rate of 7-10% issued in connection with business acquisitions, payable in
monthly installments through 2003
Convertible promissory notes (convertible into 255,123 of CHCA common stock) with 502,968 573,805
interest rate of 7-10% issued to employees in connection with business acquisitions,
payable in monthly installments through 2001
Promissory notes issued in connection with business acquisitions, with average interest 396,600 550,051
rate of 7-10%, payable through 2001
Convertible promissory notes (convertible into 160,000 shares of CHCA common stock) 120,000 100,000
bearing interest of 10%, issued to a Director; principal due September 15, 1998
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) 60,000 125,000
bearing interest of 10% payable monthly; principal due September 15, 1998
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 - 22,810
interest rate of 7%, payable in monthly installments through 1995
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
past-due 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 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.
F-11
<PAGE>
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. Interest paid in cash amounted to
$181,334 and $239,780 in 1995 and 1994 respectively. Total non-cash interest in
1995 of $18,277 was attributable to interest expense accrued but unpaid as of
December 31, 1995. Total non- cash interest in 1994 was $234,939. In connection
with the exchange of convertible debt as of June 30, 1994, the Company issued
shares of its common and preferred stock in satisfaction of $209,734 of unpaid
interest. The remaining $25,205 of non-cash interest expense was attributable to
interest expense accrued but unpaid as of December 31, 1994.
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 83,333
shares of the Company's common stock at $0.30 per share. The warrants may be
exercised anytime for a period of 3 years. Additionally, the Company will issue
to the noteholder $50,000 worth of the Company's common stock based upon market
prices in effect as of the date of the renegotiated agreements. 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.
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.
F-12
<PAGE>
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 $.75 per share (1.333 shares of
common stock for each share of Series A) and $.33 per share (3.0 shares of
common stock for each share of Series B) for Series A and Series B,
respectively. 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.
A summary of option and warrants, collectively referred to as options, is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C>
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 $0.37 $0.37
year.
- ---------------------------------------------------------------------------------------
SARs exercisable at December 31 - 1,000
- ---------------------------------------------------------------------------------------
</TABLE>
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.
F-13
<PAGE>
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 1994 and 1993, respectively.
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.
F-14
<PAGE>
The tax effects of temporary differences that give rise to the tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets: $1,493,000 $897,000
Net operating loss carryforwards 889,000 1,286,000
Goodwill 326,000 398,000
Provision for doubtful accounts 165,000 163,000
--------- ---------
Other (investment tax credits) 2,873,000 2,744,000
Deferred tax liabilities: (138,000) (109,000)
--------- ---------
Fixed assets 2,735,000 2,635,000
Valuation allowance (2,735,000) (2,635,000)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
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 limit 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.
F-15
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
F-16
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
===============================================================================================================
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
===============================================================================================================
ASSETS: 09/30/96 12/31/95
- ------- -------- --------
<S> <C> <C>
Current assets:
Cash $ 90,782 $ 85,557
Accounts receivable (net of allowance for doubtful accounts of $655,000 2,076,023 2,016,846
in 1996 and $815,000 in 1995)
Other current assets 268,099 218,316
----------- ----------
Total current assets 2,344,122 2,320,719
---------- ---------
Property and equipment, at cost:
Equipment 1,314,342 1,292,487
Less accumulated depreciation and amortization (813,334) (694,903)
----------- --------
Property and equipment, net 501,008 597,584
----------- -------
Other assets:
Goodwill (net of accumulated amortization of $366,000 in 1996 and 2,447,213 2,503,515
$284,000 in 1995)
Other 235,446 144,979
----------- -------
Total other assets 2,682,659 2,648,494
---------- ---------
TOTAL $ 5,618,570 $ 5,566,797
============ ===========
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term debt, current portion of long-term debt and Lease obligations $ 371,454 $ 521,248
Accounts payable 714,990 799,888
Accrued personnel costs 526,578 326,468
Accrued expenses and other liabilities 256,286 214,583
----------- -------
Total current liabilities 1,869,308 1,862,187
---------- ---------
Long-term debt 1,672,151 1,699,360
Other liabilities 0 26,998
------------ ------
Total liabilities 3,541,459 3,588,545
---------- ---------
Stockholders' equity:
Common stock, $.012 par value, 50,000,000 shares authorized; issued
16,273,500 in 1996) 195,282 176,428
Preferred stock, 10,000,000 shares authorized; issued 1,727,305
in 1996 and 1995 1,727,305 1,727,305
Additional paid-in capital 8,199,390 7,661,116
Accumulated deficit (7,957,366) (7,499,097)
---------- ----------
2,164,611 2,065,752
Less-treasury stock, 700,000 shares, at cost (87,500) (87,500)
----------- -------
Total stockholders' equity 2,077,111 1,978,252
----------- ---------
TOTAL $ 5,618,570 $5,566,797
============ ==========
- ---------------------------------------------------------------------------------------------------------------
See the Notes to the Condensed Consolidated Financial Statements.
===============================================================================================================
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
========================================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
========================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
========================================================================================================
1996 1995
------------------------------------------------------
<S> <C> <C>
Revenue, net $ 6,901,137 $ 6,668,024
----------- -----------
Cost and expenses:
Operating costs 5,258,134 5,653,815
Administrative and selling costs 1,662,655 829,147
Depreciation and amortization 175,486 189,000
----------- -----------
Total operating costs 7,096,265 6,671,962
----------- -----------
Operating loss (195,128) (3,938)
------------ -----------
Interest expense, net 207,356 132,137
Other expense 0 0
----------- -----------
207,356 132,137
----------- -----------
Loss before income taxes (402,484) (136,075)
Income tax provision 55,788 7,500
----------- ----------
Net loss $ (458,272) $ (143,575)
=========== ===========
Net loss per share: $(0.03) $(0.01)
----------- -----------
Average shares outstanding 15,035,889 12,635,359
- ----------------------------------------------------------------------------------------------------
See notes to Condensed Consolidated Financial Statements.
====================================================================================================
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
====================================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
====================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
====================================================================================================
1996 1995
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (458,272) $ (143,575)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 174,733 189,000
Other non-cash expenses 219,864 0
Increase in accounts receivable (59,177) (191,156)
Decrease (increase) in other current assets (49,783) (7,262)
Decrease (increase) in other assets and deferred costs (17,046) 16,973
Increase (decrease) in accounts payable and accrued expenses 262,064 32,693
---------- ----------
Net cash used in operating activities 72,383 (103,327)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (21,855) (112,016)
---------- -----------
Net cash used in investing activities (21,855) (112,016)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 180,000 408,652
Non-cash proceeds from issuance of Common Stock 10,000 125,000
Principal payments on debt and lease obligations (235,303) (518,897)
---------- -----------
Net cash provided by financing activities (45,303) 14,755
---------- -----------
Net increase (decrease) in cash 5,225 (200,588)
Cash, beginning of year 85,557 213,141
--------- -----------
CASH, END OF PERIOD $ 90,782 $ 12,553
========== ===========
- ----------------------------------------------------------------------------------------------------
See notes to Condensed Consolidated Financial Statements.
====================================================================================================
</TABLE>
F-19
<PAGE>
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1995.
NOTE B - PROPOSED ACQUISITION
The Company had signed a non-binding Letter of Intent to acquire Total Rehab,
Inc. which provided for a closing date of August 15, 1996. This date has not
been extended and the Company is not currently pursuing such acquisitions.
On September 25, 1996, the Company terminated a non-binding Letter of Intent for
a proposed public offering to be underwritten by Lew Lieberbaum & Co, Inc.
NOTE C - OTHER INFORMATION
Effective November 1, 1996 the Company announced the election of James Kenney as
Chairman of the Board of Directors and Raymond L. LeBlanc as Secretary of the
Corporation. Additionally the Company accepted the resignations of Joel Friedman
and Alan M. Mantell as Officers of the Company. Mr. Friedman, who remains a
member of the Board of Directors, had served as Chairman of the Board and
Secretary of the Corporation. Mr. Mantell served as Director, Vice Chairman and
Chief Executive Officer prior to his resignation. Unvested options to acquire
500,000 shares issued to each of Mr. Friedman and Mr. Mantell expired upon their
resignations.
On October 29, 1996, Price Waterhouse LLP, resigned as the Company's independent
accountants. On November 6, 1996 the Company filed a current report on Form 8-K
reflecting this resignation. On February 4, 1997, the Company appointed
Federman, Lally & Remis LLC as its new certifying accountants.
The Company recently completed discussions with the current factor to extend the
Company's existing Factoring Agreement to include all of the Company's
outstanding accounts receivables. The new agreement allows up to a maximum
aggregate balance of $1,500,000.
NOTE D - SUBSEQUENT EVENT
The Company has entered into a letter of intent for the sale of three of its
Pennsylvania clinics for a purchase price of $1.1 million in cash and a note,
subject to adjustment. The buyer would also assume up to $200,000 in associated
liabilities. The clinics proposed to be sold accounted for approximately 22% and
23% of the Company's total revenues for the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively. The sale is subject to the
buyer's due diligence, mutually satisfactory documentation and other conditions,
and there can be no assurance that the sale will be consummated.
F-20
<PAGE>
===================================== =================================
No dealer, salesperson or other person
has been authorized to give any
information or to make any
representations other than those
contained in this Prospectus, and if
given or made, such information or
representations must not be relied upon
as having been authorized by the
Company, any Selling Stockholder or any
Underwriter. This Prospectus does not
constitute an offer to sell or the
solicitation of an offer to buy and
security other than the Securities
offered by this Prospectus, or an offer
to sell or a solicitation of an offer to
buy any security by any person in any
jurisdiction in which such offer or
solicitation would be unlawful. Neither CONSOLIDATED HEALTH CARE
the delivery of this Prospectus nor any ASSOCIATES, INC.
sale made hereunder shall, under any
circumstances, imply that the
information in this Prospectus is
correct as of any time subsequent to the
date of this Prospectus. 6,047,017
SHARES OF
- ---------------
COMMON STOCK
TABLE OF CONTENTS
Page
----
Available Information ii
Prospectus Summary 1
Risk Factors 2
Use of Proceeds 5
Dividend Policy 6
Price Range of Common Stock 6
Management's Discussion and
Analysis of Financial Condition ----------------------
or Plan of Operations 7
Current Developments 13
Business 16 PROSPECTUS
Management 21
Principal Stockholders 24 ----------------------
Certain Relationships and Related
Transactions 26
Description of Securities 27
Selling Stockholders 30
Plan of Distribution 33 February __, 1997
Legal Matters 33
Experts 33
Additional Information 33
Index to Financial Statements F-1
===================================== =================================
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Nevada law provides that Nevada corporations may include within their
articles of incorporation provisions eliminating or limiting the personal
liability of their directors and officers in stockholders actions brought to
obtain damages or alleged breaches of fiduciary duties, as long as the alleged
acts or omissions did not involve intentional misconduct, fraud, a knowing
violation of law or payment of dividends in violation of the Nevada statues.
Nevada law also allows Nevada corporations to include in their articles of
incorporation or bylaws provisions to the effect that expenses of officers and
directors incurred in defending a civil or criminal action must be paid by the
corporation as they are incurred, subject to an undertaking on behalf of the
director or officer that he or she will repay such expenses if it is ultimately
determined by a court of competent jurisdiction that such officer or director is
not entitled to be indemnified by the corporation because such officer or
director did not act in good faith and in a manner reasonably believed to be in
or not opposed to the best interests of the corporation.
Nevada law provides that Nevada corporations may eliminate or limit the
personal liability of its directors and officers. This means that the articles
of incorporation could state a dollar maximum for which directors would be
liable, either individually or collectively, rather than eliminating liability
to the full extent permitted by the law.
The Articles of Incorporation provide that a director or officer of the
Company shall not be personally liable to the Company or its stockholders for
damages for any breach of fiduciary duty as a director or officer, except for
liability for (i) acts or omissions which involve intentional misconduct, fraud
or a knowing violation of law, or (ii) the payment of distributions in violation
of NRS 78.300. In addition, NRS 78.757 and Article VI of the Bylaws of the
Company, under certain circumstances, provide for the indemnification of
officers, directors and former officers and directors, or any person who may
have served at the request of the Board of Directors as a director of another
corporation in which the Company owns shares or of which the Company is a
creditor of the Company ("Indemnitee") against expenses which they may incur in
such capacities in connection with the defense of any action, suit or proceeding
in which they or any of them, are made parties, or a party, except, in relation
to matters as to which any Indemnitee in such action, suit or proceeding is
found to be liable for negligence or misconduct, in the performance of the
Indemnitee duty. Such indemnification under the Bylaws is not deemed exclusive
of any other rights to which those indemnified thereby.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
Amount
Registration Fee $ 799
Printing 518
Legal Fees and Expenses 30,000
Accounting Fees and Expenses 25,000
Miscellaneous 3,683
-------
TOTAL $ 60,000
- -----------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
A. In October 1993, the Company issued 560,000 shares of Common Stock to
overseas investors at prices of between $1.00 and $1.25 per share. The shares
were issued in reliance upon Regulation S promulgated under the Securities Act.
B. In November 1993, the Company issued to a financial advisor warrants to
acquire 56,000 shares of Common Stock at an exercise price of $1.75 per share.
The warrants were issued in connection with the offering of shares under
Regulation S referred to above. The warrants were issued in reliance upon
Section 4(2) of the Securities Act for transactions not involving a public
offering.
C. In November 1993, the Company issued to a financial advisor warrants to
acquire 50,000 shares of Common Stock at an exercise price of $1.75 per share,
warrants to acquire 50,000 shares of Common Stock at an exercise price of $2.00
per share, and warrants to acquire 50,000 shares of Common Stock at an exercise
price of $2.50 per share. The warrants were issued in connection with the
offering of shares under Regulation S referred to above. The warrants were
issued in reliance upon Section 4(2) of the Securities Act for transactions not
involving a public offering.
D. In December 1993, the Company issued convertible notes and other debt in the
aggregate principal amount of $1,000,000 to Renaissance Capital Partners II,
Ltd. ("Renaissance"), a private investment partnership. The debt was issued in
reliance upon Section 4(2) of the Securities Act for transactions not involving
a public offering.
E. Effective June 30, 1994, certain holders of the Company's convertible debt,
converted certain promissory notes of the Company into Common Stock of the
Company and into Series A Preferred Stock, as follows: (I) Convertible debt with
accrued interest in the aggregate amount of $3,695,984 held by Renaissance was
converted into 5,000,000 shares of Common Stock and 1,195,984 shares of Series A
Preferred Stock; (II) Convertible debt with accrued interest in the aggregate
amount of $51,375 held by Joel Friedman, then Chairman and Chief Executive
Officer of the Company, was converted into 71,429 shares of Common Stock and
15,661 shares of Series A Preferred Stock; (III) Convertible debt with accrued
interest in the aggregate amount of $51,375 held by Mr. Friedman's children was
converted into 71,429 shares of Common Stock and 15,660 shares of Series A
Preferred Stock; (IV) Convertible debt and accrued interest in the aggregate
amount of $25,688 held by Christopher Harkins, a former President of the
Company, was converted into 51,375 shares of Common Stock of the Company; and
(V) Convertible debt and accrued interest in the aggregate amount of $555,722
held by Diedre Benson, the wife of Arnold Benson, a former Chief Executive
Officer and Chairman of the Company, was converted into 1,111,444 shares of
Common Stock. The conversions were effected in reliance upon Section 3(a)(9) of
the Securities for the exchange of securities by an issuer and/or Section 4(2)
of the Securities Act for transactions not involving public offering.
F. On November 14, 1994, the Company granted to Healthcare Partners, Inc., a
designee of Mr. Benson, an option to purchase up to an aggregate of 400,000
shares of Commons Stock at an exercise price of $0.50 per share for a period of
three years. The grant was in connection with the termination of Mr. Benson's
employment with the Company and was effected in reliance upon Section 4(2) of
the Securities Act for transactions not involving a public offering.
II-2
<PAGE>
G. In September 1994, the Company issued to Renaissance a convertible promissory
note in the principal amount of $100,000, convertible into Common Stock at a
price of $0.33 per share. In October 1994, the Company exchanged the convertible
promissory note for 100,000 shares of Series B Preferred Stock. The Company also
issued to Renaissance 400,000 shares of Series B Preferred Stock at a price of
$1.00 per share. The convertible promissory note and the Series B Preferred
Stock were issued in reliance upon Section 4(2) of the Securities Act for
transactions not involving a public offering. The exchange of the note for
Series B Preferred Stock was also made in reliance on Section 3(a)(9) of the
Securities Act for the exchange of securities by an issuer.
H. In December 1994 and January 1995, the Company issued to a limited number of
private investors convertible promissory notes due 1998 in the aggregate
principal amount of $500,000, convertible into Common Stock at a price of $0.50
per share. In addition, the Company issued to these investors, without
additional consideration, warrants to purchase 300,000 shares of Common Stock at
an exercise price of $0.75 per share. The convertible promissory notes and the
warrants were issued in reliance upon Section 4(2) of the Securities Act for
transactions not involving a public offering.
I. In August 1995, Sidney Dworkin, one of the investors referred to in the
preceding paragraph and a director of the Company, and a partnership controlled
by Mr. Dworkin exchanged promissory notes in the aggregate principal amount of
$150,000 for 120,000 shares of Common Stock and $120,000 aggregate principal
amount of convertible promissory notes, convertible into Common Stock at a price
of $0.50 per share. The exchange of the promissory notes into Common Stock and
notes was effected in reliance upon Section 3(a)(9) of the Securities Act for
the exchange of securities by an issuer and/or Section 4(2) of the Securities
Act for transactions not involving a public offering.
J. In September 1995, certain of other investors referred to in the second
preceding paragraph exchanged $225,000 in principal amount of the original
convertible notes for new convertible promissory notes in the aggregate
principal amount of $60,000, convertible into Common Stock at a price of $0.50
per share and 660,000 shares of Common Stock. The issuance of the new
convertible promissory notes, and the exchange of the notes into Common Stock,
were effected in reliance upon Section 3(a)(9) of the Securities Act for the
exchange of securities by an issuer and/or Section 4(2) of the Securities Act
for transactions not involving a public offering.
K. In September 1995, the Company sold 500,000 shares of Common Stock to a
number of private investors at a price of $0.25 per share. The sale was effected
in reliance upon Section 4(2) of the Securities Act for transactions not
involving a public offering.
L. In January 1995, a holder of a 9% convertible promissory note due December
1997 (the "1997 Note"), issued in connection with a business acquisition,
exchanged approximately $26,000 of the outstanding amount of such obligation for
30,000 shares of the Company's common stock. Additionally, the same holder
forgave approximately $31,000 of the outstanding balance of another note, also
issued in connection with a business acquisition, in exchange for a new 9%
convertible promissory note due December 1999 (the "1999 Note") in the principal
amount of $235,000. The 1999 Note was convertible into shares of Common Stock at
a price per share equal to the greater of $0.75 or 100% of the month-end NASDAQ
closing price for the month preceding the date of conversion. In July 1996, the
Company renegotiated the 1997 Note and the 1999 Note, which then had aggregate
principal and accrued interest of $399,904, together with certain other
liabilities (in the principal amount of approximately $14,300) due the holder of
such notes. The holder agreed to convert the 1997 Note, together a portion of
the other liabilities, in the total amount of $188,704 into shares of Common
Stock at a conversion price of $0.45 per share (419,342 shares). The holder also
agreed to exchange the 1999 Note, together with a portion of the other
liabilities, for a new 9% convertible promissory note due 2001 in the principal
amount of $225,479, with fixed monthly payments prior to maturity and a balloon
payment at maturity. The new note will continue to be convertible into shares of
Common Stock on the same terms as the 1999 Note. The notes and shares of Common
Stock were or will be issued in reliance upon Section 4(2) of the Securities Act
for transactions not involving a public offering.
M. In January 1996, the Company issued to a vendor a three-year 12% promissory
note in the amount of $65,750 in satisfaction of an obligation to the vendor in
the same amount and agreed to issue shares of Common Stock, valued as of the
date of the agreement, in satisfaction of an additional $65,750 in trade
liabilities due such vendor. Subsequently, in June 1996, the Company issued to
the vendor 210,400 shares of Common Stock, constituting $65,750 in value of
Common Stock at $0.3125 per share. The note and the shares were issued in
reliance upon Section 4(2) of the Securities Act for transactions not involving
a public offering.
N. 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. As renegotiated,
II-3
<PAGE>
the interest rate of the notes was increased to 9.5% and the term of the notes
was extended to 2002. In consideration of the renegotiation, the Company issued
to the noteholder 177,778 shares of Common Stock, constituting $50,000 in value
of Common Stock at $0.28125 per share. The Company also issued to the noteholder
three-year options to purchase 83,333 shares of the Company's common stock at an
exercise price of $0.30 per share. The shares and options were issued in
reliance upon Section 4(2) of the Securities Act for transactions not involving
a public offering.
O. In February 1996, the Company issued 20,000 shares of Common Stock to
Christopher Harkins as a stock bonus award. The shares were issued on a no-sale
theory or, alternatively, in reliance upon Section 4(2) of the Securities Act
for transactions not involving a public offering.
P. In April 1996, the Company renegotiated a 7.5% promissory note due 1996 in
the principal amount of $413,000, which note was issued in connection with a
business acquisition. As renegotiated, the note will be due April 2001 and will
bear interest at 10% per annum. Interest only will be payable during the first
two years of the note, and the note will be self-liquidating over the remaining
three years. In consideration of the renegotiation of the note, the Company
issued to the noteholder 120,000 shares of Common Stock, constituting $30,000 in
value of Common Stock at $0.25 per share. The renegotiated note and the shares
were issued in reliance upon Section 4(2) of the Securities Act for transactions
not involving a public offering.
Q. In June 1996, the Company issued to Joel Friedman 35,714 shares of Common
Stock upon exercise of stock options at an exercise price of $0.28 per share.
The shares were issued in reliance upon Section 4(2) of the Securities Act for
transactions not involving a public offering.
R. In July 1996, the holder of a convertible promissory note issued in
connection with a business acquisition converted the note and certain accounts
payable due the note holder into Common Stock. The note with an outstanding
balance of $182,305 and the accounts payable in the amount of $6,399 were
converted at a price of $.45 per share into 419,342 shares of common stock. The
shares were issued in reliance upon Section 4(2) of the Securities Act for
transactions not involving a public offering.
S. In September 1996, the Company issued 750,000 options to each of three
executive officers at an exercise price of $0.38 per share. The options were
issued on a no-sale theory or, alternatively, in reliance upon Section 4(2) of
the Securities Act for transactions not involving a public offering.
T. In September 1996, the Company issued 108,000 shares to Renaissance and
certain other persons in consideration of a loan made by Renaissance and such
other persons to the Company. The shares were issued in reliance upon Section
4(2) of the Securities Act for transactions not involving a public offering.
U. In September 1996, the Company made stock awards totaling 300,000 shares as
follows to its outside directors: James Kenney (100,000 shares), Paul Frankel
(100,000 shares), Goodhue Smith III (75,000 shares), and Sydney Dworkin (25,000
shares). The shares were issued as director compensation at a rate of 25,000
shares for each year of service to the Board. The share were issued in reliance
of Section 4(2) of the Securities Act for transactions not involving a public
offering.
V. In December 1996, the Company issued 96,000 shares of Common Stock to
Renaissance and certain other persons in consideration of a loan made by
Renaissance and such other persons to the Company. The shares were issued in
reliance upon Section 4(2) of the Securities Act for transactions not involving
a public offering.
W. In 1994, the Company issued options to acquire 1,800,000 shares of Common
Stock at an exercise price $0.97 under the Company's 1994 Stock Option Plan. In
1996, the Company issued options to acquire 107,000 shares of Common Stock at an
exercise price of $0.28 per share under the same plan. The options were issued
on a no-sale theory or, alternatively, in reliance upon Section 4(2) of the
Securities Act for transactions not involving a public offering.
X. The Company has issued shares of Common Stock in satisfaction of its matching
obligations to the Company's 401(k) plan as follows: in 1993, 15,139 shares
valued at $17,031; in 1994, 53,075 shares valued at $35,660; in 1995, 120,000
shares in satisfaction of its 1994 obligation of $71,250; and in 1996, 180,000
shares valued at $53,935. The shares were issued in reliance upon Section 4(2)
of the Securities Act for transactions not involving a public offering.
II-4
<PAGE>
ITEM 27. EXHIBITS
(A) EXHIBITS
3.1 Articles of Incorporation.*
3.2 By-Laws.*
3.3 Certificate of Designation.*
3.4 Agreement of the holders of Series A Preferred Stock and Series B
Preferred Stock.**
5.1 Opinion of Counsel re: legality.**
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 Guarantee of Joel Friedman and Robert M. Whitty of Accounts
Receivable.**
21.1 Subsidiaries of the Registrant.**
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney (included on the signature page).
- ----------------
* Incorporated by reference to the exhibit filed under the same number in the
registrant's Annual Report of Form 10-KSB for the year ended December 31,
1994.
** Previously filed.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(1) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
Reflect in the Prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the information set forth
in the registration statement; and
Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration of the securities offered, and
the offering of the securities at that time to be the initial bona fide
offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer, or controlling person of the small business issuer
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment to this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Franklin, Commonwealth of Massachusetts, on the 11th day of February,
1997.
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
By: /s/ Robert M. Whitty
---------------------
ROBERT M. WHITTY, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 was signed by the following persons in the
capacities and on the dates stated:
SIGNATURE TITLE DATE
/s/ Raymond L. LeBlanc Treasurer, Chief Financial Officer February 11, 1997
- ---------------------- and Chief Accounting Officer ----------------
RAYMOND L. LEBLANC
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby constitutes and appoints Robert M. Whitty and Raymond L. LeBlanc, or
either of them, as such person's true and lawful attorney-in-fact and agent with
full power of substitution for such person and in such person's name, place and
stated, in any and all capacities, to sign and to file with the Securities and
Exchange Commission, any and all amendments and post-effective amendments to
this Registration Statement, with exhibits thereto and other documents in
connection therewith, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or any substitute therefor,
may lawfully do or cause to be done by virtue thereof.
Date: February 11, 1997 /s/ *
--------------------------------
James Kenney
Chairman and Director
Date: February 11, 1997 /s/ *
--------------------------------
Sidney Dworkin
Director
Date: February 11, 1997 /s/ *
--------------------------------
Paul Frankel
Director
Date: February 11, 1997 /s/ *
--------------------------------
Joel Friedman
Director
Date: February 11, 1997 /s/ *
-------------------------
Goodhue W. Smith, III
Director
By: /s/ Robert M. Whitty
-------------------------
Robert M. Whitty
Attorney-in-Fact
II-6
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated April 5, 1996 relating
to the financial statements of Consolidated Health Care Associates, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
------------------------
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1997
