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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No.0-15893
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Nevada 91-1256470
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
38 Pond Street, Suite 305
Franklin, Massachusetts 02038
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 520-2422
Securities registered pursuant to section 12(g) of Act:
Common Stock, $.012 Par Value
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year $8,799,431
The aggregate market value of the common voting stock of the Registrant, held by
non-affiliates was $2,674,335 at March 1, 1997, based upon the closing price of
the Common Stock on that date.
The aggregate number of shares of the voting stock of the Registrant, which
includes the Common Stock held by non-affiliates, was 15,669,583 at March 1,
1997.
Documents incorporated by reference: list the following documents if
incorporated by reference and the part of the Form 10-KSB into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (C) under the Securities Act of 1933. (The listed documents should be
clearly described for identification purposes.)
Transitional Small Business disclosure format. Yes [ ] No [X]
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<PAGE>
PART I
Item 1. Description of Business
General*
The Company provides ancillary health care and outpatient
rehabilitation services through a network of outpatient clinics principally in
the Northeast and Mid-Atlantic regions. The Company owns and operates ten
clinics, five in Massachusetts, one in Pennsylvania, three in Delaware and one
in Florida. The Company also provides managed ancillary health care
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
February 1997, the Company sold three clinics in Pennsylvania for $1.1 million
(See "Current Developments" below).
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 community based clinics,
nursing homes and home health agencies. The MRS system provides for the ability
to deliver contractual ancillary health care and rehabilitation services through
the community based locations that in turn, would coordinate the actual
services. The Company expects that over time the MRS business will become the
substantial focus of the Company's operations.
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 of neurologically related injuries, rehabilitation of injured workers
and preventative care. A patient who is referred to one of the Company's
rehabilitation facilities undergoes an initial evaluation and assessment process
that results in the development of a rehabilitation care plan designed
specifically for that patient. Rehabilitation services provided by the Company
include the following:
Conventional Clinical Services
All facilities provide routine acute clinical therapy
services. Services include preventive and rehabilitative services for
neuromuscular, musculoskeletal and cardiovascular injury or disease. Patients
treated are referred by physicians. Licensed physical therapists evaluate each
patient and initiate a program of rehabilitation to achieve each individual
patient's rehabilitation goals. Treatments or modalities rendered may include
traction, ultrasound, electrical stimulation, therapeutic exercise, heat
treatment and hydrotherapy. The Company's charge for its services is based upon
the specific treatments rendered. Patients requiring such services are usually
treated for one hour per day, three days per week over a period of two to five
weeks. Additionally, wherever appropriate, post-treatment maintenance and
exercise programs are provided to patients to continue their recovery on a cost
effective basis.
Occupational/Industrial Services
At several of the Company's facilities, specific programs for
the injured workers compensation patient are rendered. Services unique to the
injured worker are as follows:
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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, physiatrist,
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.
All 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 Certified Rehab Agencies consisting of
Delaware (three clinics) and Pennsylvania (one clinic). These cost reports serve
as the basis for determining the prior year's cost settlements and interim
Medicare payment rates for the next year. Medicare regulations require that a
physician must certify the need for physical and/or occupational therapy
services for each patient and that these services must be provided in accordance
with an established plan of treatment which is periodically revised. State
Medicaid programs generally do not provide coverage for outpatient physical and
occupational therapy, and, therefore, Medicaid is not 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 1996 and 1995.
Sources of Revenue/Reimbursement
1996 1995
---- ----
Workers Compensation 28% 10%
Health Maintenance Organizations 25% 13%
Motor Vehicle Insurance 18% 6%
Medicare 8% 5%
Commercial Health Insurance 7% 39%
Blue Cross/Blue Shield 5% 5%
Self Pay 4% 7%
Other 3% 12%
Medicaid 2% 3%
------ -----
Total 100% 100%
==== ====
3
<PAGE>
Consolidated Rehabilitation Services
The Company's Consolidated Rehabilitation Services ("CRS") division
provides physical, occupational, speech and respiratory therapist staffing,
along with certified home health aids, certified nurses aides, and personal care
attendants typically under intermediate term contracts, to schools, hospitals,
nursing homes, assisted living facilities and home health care companies. The
Company's CRS division has grown rapidly since its formation in September 1994.
The temporary staffing industry in general, has experienced dramatic growth over
the last decade.
Managed Rehabilitation Services
The Company continues to develop a program of managed rehabilitation
services ("MRS"), pursuant to which the Company would enter into licensing
arrangements with local, independently owned community based providers of
rehabilitative therapy ("licensee"), such as outpatient clinics, small contract
agencies and independent home care agencies. Under these arrangements, the
licensee would be the coordinator of ancillary health care and rehabilitative
therapy services, while the Company would furnish the licensee with staff,
contract development, and management services.
The Company believes that HMOs and other managed care payors are
increasingly seeking providers that can deliver multiple services in diverse
settings covering entire service areas. Under the MRS program, the Company would
assist its licensee to develop a full range of ancillary health care and
rehabilitative services, including physical, occupational, speech and
respiratory therapy, and provide for the delivery of these services in clinical
settings, hospitals, sub-acute care facilities, schools, homes and assisted
living residences. Through its contractual relationships with managed care
payors, the Company would direct contracts with such payors to its licensees.
The Company would also furnish the licensee with administrative, payroll,
billing and collection services, assist the licensee with staffing on an
as-requested basis and advise the licensee on contract management. For example,
based upon experience in the Company's own clinics and contract services
division, the Company would advise licensee 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 licensee would be licensed in any given locality, but
multiple licensees could participate in contracts arranged by the Company with
regional or national managed care payors.
The MRS model would benefit the licensee 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
responsible to manage the operations of each MRS location. The Company would be
compensated for these services through administrative and management fees along
with a percentage of each MRS location's profitability.
The Company expects that over time the MRS business will become a
substantial focus of the Company's operations. Presently, the Company has
identified a number of potential licensees for the MRS business, and has entered
into MRS licensing agreements with respect to three locations.
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.
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.
All 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, record keeping, 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
4
<PAGE>
(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.
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.
Employees
As of March 1, 1997 the Company employed 154 full and part-time
persons, 99 of whom are licensed therapists, 23 assistants and aides at the
Company's outpatient facilities, 14 of whom function in administrative
capacities at such outpatient facilities and 18 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 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.
Current Developments
On February 28, 1997, the Company completed the sale of three of its
four Pennsylvania clinics for a purchase price of $1,050,000 in cash and a note,
subject to adjustment. The clinics include those located in Millersburg, PA,
Mechanicsburg, PA and Shermans Dale, PA. The Company had purchased these clinics
from the buyer in 1993. The cash portion of the transaction was $900,000. The
buyer also assumed up to $230,000 in associated liabilities. Pursuant to the
letter of intent, the buyer agreed to advance certain operating expenses of the
clinics proposed to be sold pending closing of the transaction, which advances
would then be deducted from the cash portion of the purchase price at closing.
The buyer advanced $100,000 during the month of February 1997, which amount was
deducted at closing from the $900,000 cash portion of the purchase price.
Additionally, in January 1997 the Company agreed to satisfy a note held by the
buyer issued in connection with the 1993 business acquisition in the approximate
amount of $413,000 by assignment to the note holder of $484,000 in face amount
of accounts receivable, but only to the extent of collections in the amount due
under the note.
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* Forward - looking Statements May Prove Inaccurate
The Company has made certain forward-looking statements in this Annual Report on
Form 10-KSB that are subject to risks and uncertainties. Forward-looking
statements include information concerning the possible future results of
operations of the Company, its ancillary healthcare and outpatient
rehabilitation business and statements of information preceded by, followed by
or that include the word "believes", "expects", "anticipates", or similar
expressions. For those statements, the Company claims the protection of
safe-harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The reader is cautioned that the following
important factors, in addition to those contained elsewhere in this Annual
report on Form 10-KSB could affect the future results of the Company, its
businesses and could cause those results to differ materially from those
expressed in the forward-looking statements, such as: material adverse changes
in the economic conditions in the markets served by the Company; future
regulatory actions and conditions in the Company's operating areas, including
competition from others in the ancillary healthcare and outpatient
rehabilitation market[s].
6
<PAGE>
Financial Statements and Pro Forma Financial Information
Pro Forma Financial Data
The following Unaudited Pro Forma Consolidated Balance Sheet and
Unaudited Pro Forma Consolidated Statements of Operations give effect to the
sale of three of the Company's Pennsylvania clinics pursuant to the terms of a
Asset Purchase Agreement between the Company and the Buyer (the "Disposition").
These Unaudited Pro Forma Consolidated Financial Statements have been derived
from the Audited Statements of Operations of the Company for the year ended
December 31, 1996. The Unaudited Pro Forma Consolidated Balance Sheet gives
effect to the Disposition as if it had occurred on December 31, 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. 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>
DECEMBER 31, 1996
--------------------------------------------------------
ASSETS ACTUAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 37,141 $ 900,000(1) $ 937,141
Accounts receivable, net 1,817,036 (805,168)(2) 1,011,868
Other current assets 711,628 (21,500)(3) 690,128
Notes receivable - current portion -- 30,000(1) 30,000
----------- ----------- -----------
Total current assets 2,565,805 103,332 2,669,137
Property, plant and equipment, net 453,861 (34,763)(4) 419,098
Goodwill, net 2,428,463 -- 2,428,463
Note receivable - long term portion -- 120,000(1) 120,000
Deferred charges and other assets, net 132,437 -- 132,437
----------- ----------- -----------
TOTAL $ 5,580,566 $ 188,569 $ 5,769,135
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 778,358 $ (136,299)(2) $ 642,059
Current portion long-term debt 353,023 -- 353,023
Accrued expenses 550,123 (89,701)(2) 460,422
----------- ----------- -----------
Total current liabilities 1,681,504 (226,000) 1,455,504
Long-term debt 1,804,550 (413,259)(2) 1,391,291
Other accrued debt -- -- --
Stockholders' equity:
Preferred stock, 10,000,000 shares
authorized; Issued 1,727,305 in 1996 and 1995 1,727,305 -- 1,727,305
Common stock, $.012 par value, 50,000,000
shares authorized; Issued: 16,369,583 in 1996
and 14,702,306 in 1995 196,435 -- 196,435
Additional paid-in capital 8,230,611 -- 8,230,611
Accumulated deficit (7,972,339) 827,828(5) (7,144,511)
Less - treasury stock, 700,000 shares
at cost (87,500) -- (87,500)
----------- ----------- -----------
Total stockholders' equity 2,094,512 827,828 2,922,340
----------- ----------- -----------
TOTAL $ 5,580,566 $ 188,569 $ 5,769,135
=========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
7
<PAGE>
Notes To Unaudited Pro Forma Consolidated Condensed Balance Sheet
(1) Adjustments to reflect proceeds received by the Company from the
Disposition. The adjustments reflect proceeds of $900,000 in cash and a
$150,000 five-year note.
Cash at closing $900,000
Note receivable - current 30,000
Note receivable - long term 120,000
----------
Total purchase price $1,050,000
==========
(2) Adjustment to reflect the exchange of certain accounts pursuant to the
Disposition and related transactions. The buyer received approximately
$805,168 of net accounts receivable related to the assets disposed of and
assumed approximately $226,000 of accounts payable. In January 1997, the
Company agreed to satisfy a note of the Company held by the buyer in the
amount of $413,259, out of the proceeds of $484,000 in face amount of the
aforesaid receivables. Accordingly, the pro forma adjustments also reflect
the elimination of the liability under the note.
(3) Adjustment to reflect deferred financing expense that will be expensed on
the completion of the Disposition. In April of 1996, the Company
renegotiated a promissory note in the principal amount of $413,259, which
note was issued to the buyer in connection with the acquisition by the
Company of certain assets included in the Disposition. In consideration of
the renegotiation of the note, the Company issued to the noteholder
120,000 shares of Common Stock deemed valued at $.25 per share, or $30,000
in the aggregate. This amount was being amortized as a deferred financing
cost. The remaining unamortized portion of this deferred financing cost in
the amount of $21,500 will be expensed upon the completion of the
Disposition.
(4) Adjustment to eliminate the net value of the assets included in the
Disposition, as follows:
Fixed asset acquisition cost $89,050
Accumulated depreciation 54,287
-------
Net fixed assets 34,763
=======
(5) Adjustment to reflect the gain realized upon the Disposition.
8
<PAGE>
Unaudited Pro Forma Consolidated Statements Of Operations
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1996
------------------------------------------------
Pro Forma
Actual adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Revenue, net $8,799,431 $2,156,678 (1) $6,642,753
Costs and expenses:
Operating costs 7,015,664 1,931,633 (2) 5,084,031
Administrative and
selling 1,771,723 - (3) 1,771,723
Depreciation and
amortization 242,454 13,152 (4) 229,302
---------- ---------- ----------
Total operating costs 9,029,841 1,944,785 7,085,056
---------- ---------- ----------
Operating (loss) income (230,410) 211,893 (442,303)
Interest expense (298,564) (39,299)(5) (259,265)
Other income 86,562 381 (6) 86,181
---------- ---------- ----------
Income (loss) before
taxes and extraordinary
income (charge) (442,412) 172,975 (615,387)
Provision for taxes 30,830 - (7) 30,830
---------- ---------- ----------
Income (loss) before
extraordinary income
(charge) $ (473,242) $ 172,975 $ (646,217)
========== ========== ==========
Income (loss) before
extraordinary income
(charge) per share of
common stock $ (0.04)
==========
Average number of
common shares
outstanding 14,787,803
==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations
9
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Operations
(1) Adjustment to eliminate actual net revenues for the period presented
attributable to the assets disposed of.
(2) Adjustment to eliminate direct actual and accrued expenses relating to the
assets disposed of, which consist principally of salaries, wages, fringe
benefits and other clinical costs.
(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 assets
disposed of.
(5) In January 1997, the Company agreed to satisfy a note of the Company held
by the buyer in the amount of $413,259, out of the proceeds of $484,000 in
face amount of receivables attributable to the assets disposed of. The pro
forma adjustment eliminates actual and accrued interest expense
attributable to this note. 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 the gain on the Disposition.
(7) The Proforma adjustments do not assume any change to federal or state
income taxes as the provision for income taxes reflect minimum taxes due
various states in which the Company operates.
10
<PAGE>
Item 2. Description of 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. The Company operates ten 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.
<TABLE>
<CAPTION>
Location Sq. Ft. Year Opened
-------- ------- -----------
<S> <C> <C>
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
Wilmington, DE 1,600 1993
Newark, DE 3,900 1993
Newark, DE 1,700 1993
Boca Raton, FL 1,875 1992
</TABLE>
Item 3. Legal Proceedings
The Company is a party to pending legal proceedings, arising from the
normal business operations of the Company. Management believes these proceedings
will not have a material impact on the financial condition and results of
operations of the Company.
Item 4. Submission of Matters to Vote of Security Holders
None.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder matters
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.
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
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
On December 31, 1996 the closing price of the Company's common stock
was $.3875 per share. As of March 3, 1997, 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".
The Registrant has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business. There are no contractual restrictions on
dividends.
Recent Sales of Unregistered Securities
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.
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. The shares and options were issued in
reliance upon Section 4(2) of the Securities Act for transactions not involving
a public offering.
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.
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.
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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.
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.
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.
In September 1996, the Company issued 108,000 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.
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.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 6. 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 health care, the Company has grown
as a provider of outpatient services through acquisitions. 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 February 1997, the
Company sold three of its clinics in Pennsylvania for $1.1 million, plus the
assumption of certain associated liabilities. (See "Business--Current
Developments").
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 1996, the Company was unable to make certain
scheduled payments to note holders 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, 1996 and December 31, 1995.
Additionally, the Company is substantially dependent on its factoring
arrangements pursuant to which it has assigned a certain portion of its accounts
receivable to support its operations. The matters described above make it
imperative for the Company to maintain its present factoring arrangements and to
take actions which will result in the Company being profitable and generating
positive cash flow. The Company's independent auditors have included an
explanatory paragraph in their report dated March 12, 1997 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 developed a strategic plan during 1996 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 integrated operations of its contract service 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 Consolidated Rehabilitation Services division has
continued to experience growth since its formation in September 1994.
With the integration of the outpatient clinics with the Company's CRS
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 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 continues to develop a program of managed rehabilitation
services ("MRS"), pursuant to which the Company would enter into licensing
arrangements with independently owned, community based providers of ancillary
health care and rehabilitative services ("licensee"), such as outpatient
clinics, small contract agencies, and independent home care agencies. Under
these arrangements, the licensee would be the coordinator of ancillary health
care and rehabilitative services in outpatient clinics, hospitals, sub-acute
care facilities, schools, homes and or assisted living residences. The Company
would direct service contracts to the "licensee", arrange staffing on an
as-requested basis, assume responsibility for administration, payroll, billing
and collections and advise the "licensee" on contract management. The Company
expects that over time the MRS business will become a substantial focus of the
Company's operations.
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Liquidity and Capital Resources
The Company's liquidity, as measured by its cash decreased by $48,416
in 1996 as compared to 1995. The decrease in cash during 1996 was due
principally to losses caused by the Company's operations offset by proceeds from
issuance of debt, and to a lesser extent, from capital expenditures. The Company
was successful in renegotiating its term debt resulting in longer maturities and
lower monthly payments, in addition to converting a convertible promissory note
to common stock during 1996.
Net accounts receivable were $1,817,036 at December 31, 1996, compared
to $2,016,846 at December 31, 1995. The net decrease of $199,810 was principally
due to an increase in the allowance for doubtful accounts of approximately
$160,000 and to a lesser extent, a reduction of receivables from the closing of
two clinics in early 1996 offset by an increase in receivables from the contract
staffing business.
Accounts payable decreased by $21,530 in 1996 as compared to 1995.
The decrease is attributable to the conversion of certain accounts payable in
the amount of $65,750 to the Company's common stock as well as the conversion to
term debt, payable over three years, of certain accounts payable in the
approximate amount of $113,000.
Cash used for investing activities in 1996 consisted of purchases of
equipment of $23,679 and in 1995 consisted of $138,075 to purchase equipment and
leasehold improvements.
Financing activities in 1996 provided net cash of $84,000. Proceeds
from the issuance of debt were $340,000, issuance of stock provided $10,000, and
payments of $266,000 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 and
1996. 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. See "Debt Restructuring" below. Financing activities
in 1995 provided net cash of $36,129. Proceeds from debt totaled $335,000,
issuance of common stock provided $125,000, and payments of $423,871 were made
on long-term debt.
At December 31, 1996, the Company had outstanding approximately
$2,157,600 in notes payable and long-term debt. Of such amount, approximately
$1,451,000 is related to business acquisitions completed prior to 1995. During
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 increased during the
twelve months ended December 31, 1996 by $105,190 primarily as a result of the
conversion in July 1996 of a convertible promissory note previously issued in
connection with a business acquisition, offset by debt payments, issuance of new
debt, and the conversion of certain accounts payable amounts to term debt. Under
the conversion of the promissory note, 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 of
$.45 per share into 419,342 shares of common stock.
In December 1996, the Company determined that a demand note payable,
which it had assumed in connection with a previous business acquisition in 1991,
the outstanding balance of which was $89,231 would not have to be repaid. This
loan was originally payable to a bank that is now defunct, the assets of which
were taken over by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC
sold the loan to a third party which subsequently determined the loan to be
uncollectible. The third party returned the then deemed uncollectible loan to
the FDIC in April 1995. The Company has not made any principal or interest
payments on the loan since 1991 and has not been contacted by the FDIC regarding
repayment of the loan since that time. Management has no plans to repay the loan
and believes that it is unlikely that the FDIC will demand repayment.
Accordingly, the Company wrote-off the remaining balance under the loan of
$89,231, which has been reflected as other income in the accompanying
consolidated statement of operations for the year ended December 31, 1996.
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, 2% over the designated prime rate, or 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 December 31, 1996 the Company had received proceeds
of approximately $507,000 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 proceed 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 December 1997. At
December 31, 1996, $687,000 had been advanced under this agreement.
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<PAGE>
In April of 1996, the Company entered into a $500,000 line of credit
with Renaissance Capital Group, Inc. 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 this
arrangement.
The Company leases clinic facilities under several non-cancelable
operating leases expiring at various times between 1996 and 2000. Rent expense
for these operating leases was $542,600 in 1996 as compared to $543,600 in 1995.
During 1997, the Company anticipates that minimum payments under non-cancelable
operating leases will be approximately $505,500.
Stockholders' equity increased by $116,260 during the twelve months
ended December 31, 1996 primarily as a result of the issuance of common stock to
the Company's 401(k) profit sharing plan of $53,935, conversion of certain
accounts payable or debt to common stock totaling $445,567, 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 $473,242.
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.
The Company completed the sale of three of its Pennsylvania clinics
("the Disposition") for a purchase price of $1,050,000 million in cash and a
note, and assumption by the Buyer of approximately $230,000 of associated
liabilities, subject to adjustments. The clinics sold accounted for
approximately 22% of the Company's total revenues for the year ended December
31, 1996. The Company intends to use the proceeds from the disposition to pay
down debt and for other general corporate purposes. (See "Business--Current
Developments").
See also "Future Trends, Demands, Commitments and Uncertainties" for
additional information 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.
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. In September
1996, the holder 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 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 note holder 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 note
holder three-year options to purchase 83,333 shares of the Company's
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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 would be due
April 2001 and would bear interest at 10% per annum. Interest only would be
payable during the first two years of the note's term, and the note would be
self-liquidating over the remaining three years. In consideration of the
renegotiation of the note, the Company issued to the note holder 120,000 shares
of common stock, constituting $30,000 in value of common stock at $0.25 per
share. In January 1997, the Company agreed to satisfy the note by assignment to
the note holder of $484,000 in face amount of accounts receivable, but only to
the extent of collections in the amount due under the note.
In April 1996, the Company issued to a vendor a three-year 10%
promissory note in the amount of $32,128 in satisfaction of an obligation to the
vendor in the same amount.
In November 1996, the Company issued to a vendor a 16 month, 0%
promissory note in the amount of $80,000 in satisfaction of an obligation to the
vendor in the same amount.
Other Issuances of Shares
The Company issued an additional 739,000 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 connection
with the Renaissance line of credit to the Company, 20,000 shares to a former
executive as a stock bonus, 180,000 shares to the Company's 401(k) plan, and
35,715 shares to a member of the Board of Director resulting from the exercise
of options.
Results of Operations
Twelve Months Ended December 31, 1996
Compared to Twelve Months Ended December 31, 1995
Net revenues increased 2.1% or $181,633 during the twelve months ended
December 31, 1996 as compared to the same period in 1995. Out-patient net
revenues increased despite fewer clinics in operations during 1996 as well as
the continued impact of managed care. Growth resulted from the on-going
integration of the contract services division in the Company owned out-patient
clinics, and, to a lesser extent, from improved and more efficient billing
procedures in the clinical operations.
Outpatient physical therapy revenues increased by $135,641 or 1.6%
during the year ended December 31, 1996 as compared to the same period in 1995.
Despite the closure of two non-performing clinics during 1996 and the on-going
impact of managed care, the increase in the outpatient clinics is primarily the
result of the continued integration of the Company's contract services division.
Management believes that utilization constraints and fee reductions imposed by
managed care and the insurance industry will be continuing factors accounting
for the limited growth in the outpatient clinics. Revenues in the Company's
Consolidated Rehabilitation Services division ("CRS") increased $45,992 or 1%
which to a certain extent, is the result of new business being integrated into
the outpatient clinics.
Operating costs represented 79.7% of net revenues during the twelve
months ended December 31, 1996 as compared to 84.1% for the same period of 1995.
The $228,532 decrease in operating costs for the twelve months ended December
31, 1996 was principally due to the continued improvement of staff mix 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 change in staff mix.
Administrative and selling costs constituted $1,771,723 or 20.1% of net
revenue during the twelve months ended December 31, 1996 as compared to
$1,641,099 or 19.04% for the same period of 1995. The increase reflects
administrative and selling expenses that were higher by $130,624 for the twelve
months ended December 31, 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 increased by $12,339 during the twelve
months ended December 31, 1996 as compared to the same period in 1995. The
increase is attributable to higher depreciation expense offset by fewer clinics
in operation during 1996. In each of 1995 and also in 1996, the Company closed
two non-performing clinics. When adverse events or
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changes in circumstances indicate that previously anticipated cash flows warrant
reassessment, the Company reviews the recoverability of goodwill by comparing
estimated un-discounted future cash flows from clinical activities to the
carrying value of goodwill. Based upon the Company's 1996 review of
recoverability, it was determined that no impairment existed.
Interest expense increased by $115,541 for the twelve months ended
December 31, 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 for current and prior fiscal years.
As a result of the above factors, the Company incurred net losses of
$473,242 for the twelve months ended December 31, 1996 as compared to net losses
of $608,855 for the same period during 1995.
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 health care marketplace. Continued national
trends to contain health care 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 health care and contract rehabilitation services.
Item 7. Financial Statements
The Financial Statements of the Company are listed in the
"Index to Financial Statements and Schedule" filed as part of
this Form 10K-SB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
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.
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PART III
Item 9. Directors, Executive Officers Compliance with section 16(a) of the
Exchange Act
NAME AGE POSITION
--------- --- ---------
James Kenney 55 Chairman of the Board(1)(3)
Robert M. Whitty 41 President and Director
Joel Friedman 56 Director(1)
Sidney Dworkin 76 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., Industrial Holdings, Inc.,
Scientific Measurement Systems, 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 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 and became a
director of the Company in January 1997. 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.
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. Mr.
Dworkin was a founder, former President, Chief Executive Officer and Chairman of
Revco, Inc. Between 1987 and the present, Mr. Dworkin has also served as
Chairman of the Board of Stonegate Trading, Inc., an importer and exporter of
various health and beauty aids, groceries and sundries. Between 1988 and the
present, Mr. Dworkin has served as Chief Executive Officer of Advanced Modular
Systems, which is engaged in the sale of modular buildings. Between June 1993
and the present, Mr. Dworkin also has 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. Mr. 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.
19
<PAGE>
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 "Description of
Securities -- Preferred Stock -- Series A Preferred Stock"). Messrs.
Kenney and Smith are designees of Renaissance.
In 1996, 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 1996, 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.
Compliance With Section 16(a) of the
Securities Exchange Act of 1934
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the fiscal year ended December 31, 1996, none
of the officers, directors and ten-percent beneficial owners of the Company
failed to file timely any such reports under Section 16(a) of the Securities
Exchange Act of 1934.
20
<PAGE>
Item 10. 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").
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payout
==========================================================================================================================
Restricted All Other
Name and Other Annual Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus Compensation Awards SARs Payout 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 1,250,000 0 0
Board and Chief 1994 0 0 0 0 0 0 0
Executive
Officer(1)
- --------------------------------------------------------------------------------------------------------------------------
Alan Mantell, 1996 120,000 0 0 0 787,667 (4) 0 0
Chief Executive
Officer(2)
- --------------------------------------------------------------------------------------------------------------------------
Robert M. 1996 140,000 0 0 0 781,666 0 0
Whitty, 1995 106,000 0 0 0 0 0 0
President (3)
==========================================================================================================================
</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.
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 1996 by any
executive officers included in the above table did not exceed 10% of such
person's 1996 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 that the
holder had earlier agreed to return. At that time, the Company 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.
21
<PAGE>
The following table sets forth information concerning grants of options
by the Company in 1996:
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
===================================================================================================================
Percentage of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted Year Price per Share Expiration Date
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Friedman 37,667 $.28 2/01/01
750,000(1) 34% .38 9/01/06
- ------------------------------------------------------------------------------------------------------------------
A. Mantell 37,667 .28 2/01/01
750,000(1) 34% .38 9/01/06
- ------------------------------------------------------------------------------------------------------------------
R. M. Whitty 31,666 .28 2/01/01
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.
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:
<TABLE>
<CAPTION>
Aggregate Option Exercises In Last Fiscal Year
Value of Unexercised
Number of Unexercised Options In-the-money Options at
held at 12/31/96 December 31, 1996(1)
=======================================================================================================================
Shares
Acquired on
Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Friedman 35,714 $3,571 251,912 0 $191 0
A. Mantell 0 0 287,666 0 3,766 0
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).
22
<PAGE>
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.
In September 1996, Mr. Friedman surrendered options covering 833,000
shares of common stock which were granted in December 1994 pursuant to the 1994
Plan. The exercise of the options surrendered by Mr. Friedman was contingent on
the common stock reaching prices significantly higher than the market price at
the time of the surrender. New options covering 750,000 shares of common stock
were granted to Mr. Friedman in September 1996, with exercise prices equal to
$0.38 per share (the fair market value per share on the date of the grant),
pursuant to 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 Mr. Friedman expired unexercised upon his
termination of employment with the Company in November 1996. The old options
held by Mr. Friedman were designed to further compensate and provide for an
incentive for such employee. The Compensation Committee believed that by
awarding Mr. Friedman new options with exercise prices at $0.38 per share (the
fair market value per share on the date of the grant), would result in fair
compensation for his efforts. The Compensation Committee also believed that
exchanging "out-of-the-money" options is a cost-effective method of retaining
key members and preserving the important motivating effect that stock options
have.
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 non-qualified 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 ISO's that may vest in any year is limited by the
Internal Revenue Code of 1986, as amended.
23
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
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 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>
============================================================================================================
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Renaissance Capital Partners II, Ltd. 9,257,217(1) 46.8%
8080 N. Central Expwy.
Suite 210-LAN 59
Dallas, TX 75206
- ------------------------------------------------------------------------------------------------------------
Joel Friedman 564,434(2) 3.5%
- ------------------------------------------------------------------------------------------------------------
Sidney Dworkin 466,951(3) 2.9%
- ------------------------------------------------------------------------------------------------------------
James Kenney 180,000(4) 1.1%
- ------------------------------------------------------------------------------------------------------------
Dr. Paul Frankel 180,000(5) 1.1%
- ------------------------------------------------------------------------------------------------------------
Goodhue W. Smith, III 122,000(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 group 2,091,708(9) 12.3%
(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 80,000 shares subject to currently exercisable stock options.
(5) Includes 30,000 shares subject to currently exercisable stock options.
(6) Includes 30,000 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 961,245 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.
24
<PAGE>
Item 12. 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 Health Care Partners, Inc., a designee of
Mr. Benson, on the Effective Date of the Termination Agreement, an option to
purchase up to an aggregate of 400,000 shares of common stock for $.50 per share
for a period of three years. The Company 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, now the Chairman of the Board of Directors and
then 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.
25
<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's 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 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.
26
<PAGE>
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K
(a)(1) The Registrant's financial statement together with a separate table of
content are annex t hereto.
(b) Exhibits: See Index to Exhibits
Index to Exhibits
Exhibit No.
3.1 Articles of Incorporation (incorporated herein by reference to Exhibit
3.1 to the Company's Annual report on Form 10-KSB for the year ended
December 31, 1995 (the "1995 Form 10-K").
3.2 By-Laws of the Company (incorporated herein by reference to Exhibit
3.2 to 1995 Form 10-KSB).
3.3 Certificate of Designation (incorporated herein by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1989).
10.1 Employment Agreement between the Company and Christopher Harkins,
dated June 3, 1993 (incorporated herein by reference to Exhibit 10.1
to 1995 Form 10-KSB).
10.2 Termination Agreement between the Company and Arnold Benson, dated
September 8, 1994 (Incorporated herein by reference to Exhibit 10.2 to
1995 Form 10-KSB).
10.3 1989 Stock Option Plan (incorporated herein by reference to Exhibit
10.3 to 1995 Form 10-KSB).
10.4 1994 Stock Option Plan (incorporated herein by reference to Exhibit
10.4 to 1995 Form 10-KSB).
10.5 Health Care Factoring Agreement between the Company and Capital Health
Care Financing, dated January 15, 1996 (incorporated herein by
reference to Exhibit 10.5 to 1995 Form 10- KSB).
21.1 Subsidiaries of the Registrant (incorporated herein by reference to
Exhibit 21.1 to 1995 Form 10-KSB).
27 Financial Data Schedule.
- -------------------
(b) Reports on Form 8-K
(I) Current Report on Form 8-K filed on November 6, 1996
reporting on Changes in Registrant's Certifying Accountant.
27
<PAGE>
Financial Statements and Schedules
Table of Contents
Consolidated Health Care Associates, Inc.
Page
----
Independent Auditors' Report - Price Waterhouse LLP F-2
Independent Auditors' Report - Federman, Lally & Remis LLC F-3
Consolidated statements and notes as of December 31, 1996,
and 1995 and for the years then ended:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-7 to F-18
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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-4 through F -16 present fairly, in all material respects, the financial
position of Consolidated Health Care Associates, Inc. and its subsidiaries at
December 31, 1995, and the result of their operations and their cash flows for
the year, 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 audit. We conducted our audit 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 audit provides 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>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Consolidated Health Care Associates, Inc.
We have audited the accompanying consolidated balance sheet of Consolidated
Health Care Associates, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Consolidated Health
Care Associates, Inc. and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 15, the
Company has suffered recurring losses, including a net loss in excess of
$473,000 for the year ended December 31, 1996, and has an accumulated deficit in
excess of $7,972,000 as of December 31, 1996, which raises substantial doubt
about its ability to continue as a going concern. Management's plans regarding
these matters are also described in Note 15. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Federman, Lally & Remis LLC
Farmington, Connecticut
March 12, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
=========================================================================================================================
Consolidated Balance Sheets as of December 31, 1996 and 1995
=========================================================================================================================
<S> <C> <C>
ASSETS: 1996 1995
- ------- ---- ----
Current assets:
Cash $ 37,141 $ 85,557
Accounts receivable (net of allowance of $977,000 in 1996 and $815,000 in
1995) 1,817,036 2,016,846
Other accounts receivable 535,225 116,260
Other current assets 176,403 102,056
---------- ---------
Total current assets 2,565,805 2,320,719
---------- ---------
Property and equipment, at cost:
Equipment and leasehold improvements 1,316,166 1,292,487
Less accumulated depreciation and amortization (862,305) (694,903)
---------- ---------
Property and equipment, net 453,861 597,584
---------- ---------
Other assets:
Goodwill (net of accumulated amortization of $384,342 in 1996 and $309,290
in 1995) 2,428,463 2,503,515
Other 132,437 144,979
---------- ---------
Total other assets 2,560,900 2,648,494
---------- ---------
TOTAL $5,580,566 $5,566,797
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable and current portion of long-term debt $ 353,023 $ 521,248
Accounts payable 778,358 799,888
Accrued personnel costs 377,085 326,468
Accrued expenses and other liabilities 173,038 214,583
---------- ---------
Total current liabilities 1,681,504 1,862,187
Long-term debt 1,804,550 1,699,360
Other liabilities - 26,998
---------- ---------
Total liabilities 3,486,054 3,588,545
---------- ---------
Commitments and contingencies (Notes 6 and 10))
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized; issued and outstanding 1,727,305
in 1996 and 1995 1,727,305 1,727,305
Common stock, $.012 par value, 50,000,000 shares authorized; issued
16,369,583 in 1996, and 14,702,306 in 1995 196,435 176,428
Additional paid-in capital 8,230,611 7,661,116
Accumulated deficit (7,972,339) (7,499,097)
---------- ---------
2,182,012 2,065,752
Less-treasury stock, 700,000 shares of common stock, at cost (87,500) (87,500)
---------- ---------
Total stockholders' equity 2,094,512 1,978,252
---------- ---------
TOTAL $5,580,566 $5,566,797
========== ==========
- -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
=========================================================================================================================
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
===============================================================================================================
Consolidated Statements of Operations
For the Years Ended December 31, 1996 and 1995
===============================================================================================================
1996 1995
---------------------------------
<S> <C> <C>
Revenue, net $ 8,799,431 $8,617,798
----------- -----------
Costs and expenses:
Operating costs 7,015,664 7,244,196
Administrative and selling costs 1,771,723 1,641,099
Depreciation and amortization 242,454 230,115
----------- -----------
Total costs and expenses 9,029,841 9,115,410
----------- -----------
Operating loss (230,410) (497,612)
Interest expense (298,564) (183,023)
Other income, net 86,562 81,780
----------- -----------
Loss before income tax provision (442,412) (598,855)
Income tax provision 30,830 10,000
----------- -----------
Net loss $ (473,242) $ (608,855)
=========== ===========
Net loss per share $(.04) $(.05)
=========== ===========
- ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
===============================================================================================================
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
==================================================================================================================================
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
==================================================================================================================================
Additional
Preferred Common Treasury Paid-In Accumulated
Stock Stock Stock Capital Deficit
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $1,727,305 $159,268 $(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 $1,727,305 $176,428 $(87,500) $7,661,116 $(7,499,097)
Common stock issued 20,007 569,495
Net loss for the year (473,242)
---------- -------- -------- ---------- -----------
Balance, December 31, 1996 $1,727,305 $196,435 $(87,500) $8,230,611 $(7,972,339)
========== ======== ======== ========== ============
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
==================================================================================================================================
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
===========================================================================================================
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
===========================================================================================================
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(473,242) $(608,855)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation 167,402 156,000
Amortization of goodwill 75,052 74,115
Loss on disposal of fixed assets - 2,500
Gain on debt restructuring (89,231) (31,372)
Non-cash interest expense 21,434 18,277
Non-cash expense for 401K contribution 53,935 79,500
Non-cash compensation expenses 118,750 -
(Increase) decrease in accounts receivable (179,155) 139,319
(Increase) decrease in other current assets (13,191) (151,643)
(Increase) decrease in other assets 41,002 93,017
Increase (decrease) in accounts payable, accrued personnel costs,
accrued expenses, and other liabilities 168,507 203,504
----------- ---------
Net cash used for operating activities (108,737) (25,638)
----------- ---------
Cash Flows From Investing Activities:
Purchases of equipment (23,679) (138,075)
----------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of debt 340,000 335,000
Proceeds from issuance of common stock 10,000 125,000
Principal payments on debt (266,000) (423,871)
----------- ---------
Net cash provided by financing activities 84,000 36,129
----------- ---------
Net decrease in cash (48,416) (127,584)
Cash, beginning of year 85,557 213,141
----------- ---------
Cash, end of year $ 37,141 $ 85,557
=========== =========
- -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
===========================================================================================================
</TABLE>
F-7
<PAGE>
Consolidated Health Care Associates, Inc.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
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
Company owns and operates ten clinics, five in Massachusetts, one in
Pennsylvania, three in Delaware and one in Florida. The Company also provides
managed ancillary health care rehabilitation services through contract staffing,
principally in Massachusetts, Pennsylvania, Florida, Delaware and New York.
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 accompanying 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 payors and contracted agreements.
Substantially all of the Company's accounts receivable are due from third-party
insurance companies or government agencies.
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, and leasehold improvements as follows:
Equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Leasehold improvements 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.
Income Taxes
Income taxes are provided utilizing the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those differences are expected
to be recovered or settled.
F-8
<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. The Company adopted FAS 121 in 1996. The
effect on the Company's financial position or results of operations from
adoption of FAS 121 is not material.
The FASB issued Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (FAS 123) in October 1995 effective for years
beginning after December 15, 1995. FAS 123 was implemented by the Company during
1996. FAS 123, establishes a fair value-based method of accounting for stock
options and other equity instruments. It requires the use of that method for
transactions with other than employees and encourages its use for transactions
with employees. Under provisions of FAS 123, the Company is not required to
change its method of accounting for stock based compensation and management has
retained its current method of accounting.
The FASB issued Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" (FAS 125)
in June of 1996. The effective date of FAS 125 was December 31, 1996, and was to
be applied prospectively to transfers and servicing of assets and extinguishment
of liabilities occurring after that date. The FASB issued Financial Accounting
Standard No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" (FAS 127) in December of 1996. FAS 127 delays the application
of FAS 125 until December 31, 1997. The effect on the Company's financial
position or results of operations from the adoption of FAS 125 is not expected
to be material.
Reclassifications
Certain 1995 amounts have been reclassified to agree with the 1996 presentation.
2. Accounts Receivable Financing
Substantially all of the Company's accounts receivable are due from third-party
insurance companies or government agencies. Beginning in 1995, the Company
factors with recourse all of the accounts receivable of Consolidated
Rehabilitation Services, Inc. and certain accounts receivable of PTS Rehab, Inc.
Subsequent to year end, the Company renegotiated its factoring arrangement to
increase the credit line from $1,250,000 to $2,000,000, as set forth in Note 16.
The Company accounts for these factoring arrangements as sales. During the years
ended December 31, 1996 and 1995 the Company received $2,938,000 and
$1,377210,000 of proceeds from the factoring of accounts receivable,
respectively. At December 31, 1996 and 1995, the Company was contingently liable
for approximately $1,407,000 and $327,000 of such accounts, respectively.
Reserves are included in the allowance for doubtful accounts in the accompanying
balance sheet to provide for the estimated uncollectible portion of accounts
receivable with recourse. Service fees charged by the factoring agent during
1996 and 1995 totaled $45,000 and $18,700 respectively, and are included as
interest expense on the accompanying consolidated statements of operations. At
December 31, 1996 and 1995, the Company had transferred accounts receivable in
excess of the proceeds it received from its factor of $535,225 and $116,216,
respectively, which are reflected as other receivables in the accompanying
consolidated balance sheets.
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
F-9
<PAGE>
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's resignation
on November 1, 1996 as the Company's Chairman and as an officer of the Company,
Mr. Friedman's guarantees were released.
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
1996 or 1995.
Changes in goodwill during 1996 and 1995 are summarized as follows:
===========================================================================
1996 1995
- ---------------------------------------------------------------------------
Balance, January 1, $2,503,515 $2,577,630
Goodwill amortization (75,052) (74,115)
--------- ----------
Balance, December 31, $2,428,463 $2,503,515
========== ==========
===========================================================================
4. Revenue, Net
Revenue is reported net of allowances as follows:
<TABLE>
<CAPTION>
==================================================================================================
1996 1995
==================================================================================================
<S> <C> <C>
Revenue $12,003,250 $11,659,001
Allowances for contractual and other adjustments (3,203,819) (3,041,203)
----------- -----------
Revenue, net $ 8,799,431 $ 8,617,798
=========== ===========
=================================================================================================
</TABLE>
F-10
<PAGE>
5. Supplemental Disclosure of Cash Flows and Noncash Investing and
Financing Activities
During 1996, the Company issued 419,342 shares of common stock to reduce the
outstanding principal of long-term debt by $182,802. Additionally, the Company
issued 180,000 shares of common stock, valued at $53,935, to the Company's 401K
plan, 210,400 shares of common stock, valued at $65,750 to a vendor in
satisfaction of an obligation in the same amount, and 501,778 shares of common
stock, valued at $154,812 to noteholders as consideration for certain financing
activities on behalf of the Company. In addition, $108,000 of accounts payable
were converted to term debt.
During 1995, the Company issued 1,310,000 shares of common stock to reduce the
outstanding principal of long-term debt by $345,688. Additionally, the Company
issued 120,000 shares of common stock, valued at $79,500, to the Company's 401K
plan.
6. Lease Commitments
The Company leases clinic facilities under several non-cancelable operating
leases expiring at various times between 1996 and 2000. Rent expense for these
operating leases was $542,600 in 1996 and $543,600 in 1995.
Future minimum payments under non-cancelable facility operating leases for the
five years subsequent to December 31, 1996 are:
Operating
Leases
================================================================
1997 $505,491
1998 245,948
1999 56,207
2000 30,296
2001 31,825
--------
Total minimum lease payments $869,767
-------
================================================================
F-11
<PAGE>
7. Notes Payable and Long-Term Debt
Notes payable and long-term debt consists of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Convertible promissory notes (convertible into 292,184 shares of CHCA $702,530 $900,858
common stock) with interest rate of 7-10% issued in connection with business
acquisitions, payable in monthly installments through 2002
Convertible promissory notes (convertible into 238,474 of CHCA common 461,251 502,968
stock) with interest rate of 7-10% issued to employees in connection with
business acquisitions, payable in monthly installments through 2001
Promissory notes to Renaissance Capital Partners and other stockholders with 340,000 -
interest at 10%, payable in full in April 1999
Promissory notes issued in connection with business acquisitions, with average 297,262 396,600
interest rate of 7-10%, payable monthly through 2001
Convertible promissory notes (convertible into 160,000 shares of CHCA 120,000 120,000
common stock) bearing interest of 10%, issued to a Director; principal payable
in full September 1998
Non-interest bearing note payable with monthly payments through 1997 84,750 25,000
Convertible promissory notes (convertible into 80,000 shares of CHCA 60,000 60,000
common stock) bearing interest of 10% payable monthly; principal payable in
full September 1998
Promissory note with interest rate of 12%, payable in monthly installments 49,781 65,750
through 1999
Promissory notes with average interest rates of 9-11% payable in monthly 41,999 -
installments through 1999
Demand notes with interest paid monthly at prime rate plus 4% - 89,432
Non-interest bearing loan payable to officers; paid in January 1996 - 60,000
---------- ----------
Total long-term debt 2,157,573 2,220,608
Less: current portion of debt (353,023) (521,248)
---------- ----------
Long-term debt $1,804,550 $1,699,360
========== ==========
</TABLE>
Substantially all of the Company's assets are security for the above debt.
At December 31, 1996 and 1995, the Company was in default for non-payment of
principal and interest on one or more 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.
F-12
<PAGE>
In January 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 issued $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.
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 note holder 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 issued to
the note holder $50,000 worth of the Company's common stock based upon market
prices in effect as of the date of the renegotiated agreements.
In April 1996, the Company renegotiated a convertible promissory note held by an
employee issued in connection with a business acquisition, which was originally
due in 1996. The new renegotiated note was extended for five years with
interest-only payments at 10% to be made in 1996 and 1997. In consideration, the
Company released the employee from non-compete agreements and issued $30,000
worth of the Company's common stock based upon market prices in effect as of the
date of the agreement.
In April 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.
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 to common stock. The note, which had an outstanding balance of
$182,305 and the accounts payable in the amount of $6,399 were converted into
419,342 shares of common stock at a price of $.45 per share.
In December 1996, the Company determined that a demand note payable, which it
had assumed in connection with a previous business acquisition in 1991, the
outstanding balance of which was $89,231 would not have to be repaid. This loan
was originally payable to a bank that is now defunct, the assets of which were
taken over by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC sold
the loan to a third party which subsequently determined the loan to be
uncollectible. The third party returned the then deemed uncollectible loan to
the FDIC in April 1995. The Company has not made any principal or interest
payments on the loan since 1991 and has not been contacted by the FDIC regarding
repayment of the loan since that time. Management has no plans to repay the loan
and believes that it is unlikely that the FDIC will demand repayment.
Accordingly, the Company wrote-off the remaining balance under the loan of
$89,231, which has been reflected as other income in the accompanying
consolidated statement of operations for the year ended December 31, 1996.
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-13
<PAGE>
Aggregate annual long-term debt maturities for the next five years are:
=============================================================
Year Ending December 31,
1997 $353,023
1998 $410,719
1999 $569,982
2000 $241,002
2001 $283,075
2002 and thereafter $299,772
----------
Total $2,157,573
==========
=============================================================
8. Stockholders' Equity
Preferred Stock and Common Stock
At December 31, 1996 and 1995, the Company had outstanding shares of preferred
and common stock as follows:
Preferred Preferred Common
Series A Series B Stock
Balance, January 1, 1995 1,227,305 500,000 13,272,306
Number of shares issued for
Reduction of debt 0 0 1,310,000
Contribution to 401(k) plan 0 0 120,000
--------- -------- ----------
Total of shares issued 0 0 1,430,306
--------- -------- ----------
Balance, December 31, 1995 1,227,305 500,000 14,702,306
--------- -------- ----------
Number of shares issued for
Reduction of debt 0 0 1,187,277
Contribution to 401(k) plan 0 0 180,000
Directors' compensation 0 0 300,000
--------- -------- ----------
Total of shares issued 0 0 1,667,277
--------- -------- ----------
Balance, December 31, 1996 1,227,305 500,000 16,369,583
========= ======= ==========
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 totaled $259,096 and $155,458 at
December 31, 1996 and 1995, respectively. No dividends were declared in 1996 or
1995; therefore, cumulative dividends in arrears are not recorded in the
accompanying consolidated balance sheets. 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.
Options
The Company has stock options outstanding to participants under the 1994 Stock
Option Plan (the 1994 Plan) approved by stockholders on June 20, 1995, effective
November 3, 1994. 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
F-14
<PAGE>
options, incentive (performance) stock options and restricted stock awards.
Options granted under the Plan will be exercisable as determined by the Options
Committee of the Board of Directors (the Committee). The Committee may prescribe
the options granted become exercisable in installments or provide that an option
may be exercisable in full immediately upon the date of the 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. The Company also has stock options outstanding under the 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 422A of the Internal Revenue Code of 1986) and
restricted stock awards. Options 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.
The Company also has other option awards. Of these, due to the termination of an
officer, 204,584 options issued to the officer prior to 1994, were canceled
during 1995.
Stock option transactions during 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1989 Stock Weighted 1994 Stock Weighted Other Weighted
Option Plan Average Option Plan Average Option Average
Exercise Exercise Plans Exercise
Price Price Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 120,000 $1.31 1,800,000 $0.97 668,084 $0.48
- -------------------------------------------------------------------------------------------------------------------------------
Granted 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Expired 0 (416,667) $0.97 0
- -------------------------------------------------------------------------------------------------------------------------------
Canceled (100,000) $1.31 (250,000) $0.97 (104,584) $0.45
- -------------------------------------------------------------------------------------------------------------------------------
Exercised 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 20,000 $1.31 1,133,333 $0.97 563,500 $0.49
- -------------------------------------------------------------------------------------------------------------------------------
Granted 0 2,357,000 $0.38 333,333 $0.36
- -------------------------------------------------------------------------------------------------------------------------------
Expired 0 (1,000,000) $0.38 (563,500)
- -------------------------------------------------------------------------------------------------------------------------------
Canceled 0 (933,333) $0.97 (250,000) $0.45
- -------------------------------------------------------------------------------------------------------------------------------
Exercised 0 (35,714) $0.28 0
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 20,000 $1.31 1,521,286 $0.45 83,333 $0.30
========= ========= ==========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In accordance with the terms of APB No. 25, the Company records no compensation
expense for its stock option awards. However, the majority of all options can be
forfeited based upon the discretion of the Board of Directors, if in their
opinion expectations have not been met, which currently the Board of Directors
has not defined. Therefore there is no material pro forma effect that would be
disclosed. Additionally, the weighted average recurring contractual lives of the
options cannot be determined.
F-15
<PAGE>
Warrants
Warrants were issued in conjunction with various placements of stock and
refinancing of debt. A summary of warrants outstanding is as follows:
1996 1995
---- ----
Balance outstanding, January 1, 881,000 581,000
Issued 0 300,000
Expired 431,000 0
------- -------
Balance outstanding, December 31, 450,000 881,000
======= =======
Exercise price range for warrants $0.75 - $2.08 $0.75 - $2.08
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 issued during each year. The number of shares used in the
computation for the years ended December 31, 1996 and 1995 is 15,834,220 and
13,771,855 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 as a result of these claims would not have a significant impact on the
Company's consolidated financial position and results of operations.
11. Related Parties
During 1996, the Company retained the services of a management consultant
company which is affiliated with a current director of the Company. The Company
incurred approximately $20,520 in consulting fees in connection with the
services rendered by this company, the entire amount of which is included in
accounts payable in the accompanying consolidated balance sheet as of December
31, 1996. During 1995, the Company retained legal services from the law firm of
a former director of the Company, for which it was paid $32,937.
As set forth in Note 7, during 1996 the Company was advanced $340,000 under an
arrangement with Renaissance, a major stockholder of the Company. Interest
expense related to this loan was $10,600 for 1996.
The Company rents rehabilitation clinics from an employee. Total rental expense
of $133,520 was paid by the Company in 1996 and 1995.
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 1996 and 1995 related to the plan was $50,100 and $79,500,
respectively. During 1996 and 1995 the Company issued 180,000 and 120,000 shares
of common stock to the Plan reflecting the Company's matching contribution for
employee's contributions during 1995 and 1994, respectively.
F-16
<PAGE>
13. Accrued Expenses and Other Liabilities
Components of accrued expenses and other liabilities are as follows:
1996 1995
---- ----
Accrued expenses $129,038 $214,583
Accrued corporate taxes 44,000 -
-------- --------
Total $173,038 $215,583
======== ========
14. Income Taxes and Deferred Income Taxes
The provision for income taxes on income from continuing operations in 1996 and
1995 is comprised of minimum taxes due to various states in which the Company
operates. The tax effects of temporary differences that give rise to deferred
tax assets and liabilities are as follows:
1996 1995
---- ----
Deferred tax assets:
Net operating loss carry forwards $1,108,000 $809,000
Goodwill 1,231,000 1,249,000
Provision for doubtful accounts 391,000 326,000
Other (investment tax credits) 4,000 4,000
---------- ---------
2,734,000 2,388,000
---------- ---------
Deferred tax liabilities:
Fixed assets (80,000) (81,000)
Cash to accrual Section 481A
Adjustment (60,000) (89,000)
---------- ----------
(140,000) (170,000)
---------- ----------
2,594,000 2,218,000
Valuation allowance (2,594,000) (2,218,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
A valuation allowance must be established for deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. The Company has
determined that a valuation allowance is required since it is not certain that
the results of future operations will generate sufficient taxable income to
realize the deferred tax asset. During the year ended December 31, 1996, the
valuation allowance increased by $376,000 which included a decrease in the
beginning-of-the-year valuation allowance caused by a change in circumstances
that caused a change in judgment about the realizability of deferred tax assets
of $517,000. During the year ended December 31, 1995, the valuation allowance
increased by $100,000.
At December 31, 1996, the Company has Federal net operating loss carry forwards
available to reduce future taxable income of approximately $2,770,000. This
carry forward expires in varying amounts from approximately 1999 through 2011.
It is the Company's understanding that a substantial change in ownership
occurred during 1994 as defined under Section 382 of the Internal Revenue Code.
In general, a substantial change in ownership may significantly limit the future
utilization of tax loss carry forwards incurred prior to an ownership change. As
of December 31, 1996, approximately $451,000 of the Company's net operating loss
carry forward continues to be limited under Section 382. This limitation,
itself, will expire during 1997. Accordingly, for tax year 1997, all of the
Company's net operating loss carry forwards should be available to reduce future
income.
15. Liquidity
The Company has suffered recurring losses in each of the past four years,
including a net loss of $473,242 and $608,855 for the years ended December 31,
1996 and 1995, respectively. The Company also has an accumulated deficit of
$7,972,339 as of December 31, 1996. As a result, during both 1996 and 1995, the
Company was unable to make certain scheduled principal and interest payments to
note holders and was required to negotiate extended payment terms in certain
cases and issue convertible
F-17
<PAGE>
promissory notes in exchange for short-term notes in other cases. In addition,
the Company is dependent upon its factoring arrangements pursuant to which it
assigned a substantial portion of its accounts receivable to meet its
obligations. These matters raise substantial doubt about the Company's ability
to continue as a going concern.
However, as described in Note 16, subsequent to December 31, 1996 the Company
successfully negotiated a new agreement with its accounts receivable factor
under which the maximum borrowing were increased from $1,250,000 to $2,000,000.
The Company also sold three of its four Pennsylvania clinics for $900,000 in
cash, $150,000 in notes receivable, and the assumption of approximately $230,000
in associated liabilities. Management intends to use the proceeds of the sale of
these clinics to reduce its outstanding debt and for continued operating needs.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
16. Subsequent Events
In January 1997, the Company executed a new agreement with its accounts
receivable factor. The new agreement increases the maximum borrowing from
$1,250,000 to $2,000,000.
In February 1997, the Company sold three of its four Pennsylvania clinics for
$900,000 in cash and $150,000 in notes receivable. The purchaser also assumed
approximately $230,000 in liabilities. Approximately 22% of the Company's total
1996 revenues were attributable to these clinics. The proceeds from the sale of
these clinics are intended to be used to reduce the Company's outstanding debt
and to fund current operations.
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
Consolidated Health Care Associates, Inc.
Date: March 31, 1997 /s/ Robert M. Whitty
------------------------------------------
ROBERT M. WHITTY
President
Date: March 31, 1997 /s/ Raymond L. LeBlanc
------------------------------------------
RAYMOND L. LEBLANC
Treasurer, Secretary, and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Date: March 31, 1997 /s/ James W. Kenney
------------------------------------------
JAMES W. KENNEY
Director
Date: March 31, 1997 /s/ Joel Friedman
------------------------------------------
JOEL FRIEDMAN
Director
Date: March 31, 1997 /s/ Robert M. Whitty
------------------------------------------
ROBERT M. WHITTY
Director
Date: March 31, 1997 /s/ Paul Frankel
------------------------------------------
PAUL FRANKEL
Director
Date: March , 1997 /s/ Goodhue W. Smith III
------------------------------------------
GOODHUE W. SMITH III
Director
Date: March , 1997 /s/ Sidney Dworkin
------------------------------------------
SIDNEY DWORKIN
Director
i
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 37,141
<SECURITIES> 0
<RECEIVABLES> 3,329,261
<ALLOWANCES> 977,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,565,805
<PP&E> 1,316,166
<DEPRECIATION> 862,305
<TOTAL-ASSETS> 5,580,566
<CURRENT-LIABILITIES> 1,681,504
<BONDS> 0
0
1,727,305
<COMMON> 196,435
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,580,566
<SALES> 8,799,431
<TOTAL-REVENUES> 8,799,431
<CGS> 7,015,664
<TOTAL-COSTS> 9,029,841
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 298,564
<INCOME-PRETAX> (442,412)
<INCOME-TAX> 30,830
<INCOME-CONTINUING> (473,242)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (473,242)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.02)
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