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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from _______________ to ______________
Commission file number 1-10677
DRCA Medical Corporation
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(Exact name of small business issuer as specified in its charter)
Texas 76-0203483
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Riverway, Suite 1430, Houston, Texas 77056
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(Address of principal executive offices, including zip code)
(713) 439-7511
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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. [ ]
Net revenues of the issuer for the fiscal year ended December 31, 1995
were $15,539,355.
The aggregate market value of Common Stock held by non-affiliates of
the issuer as of March 15, 1996, computed by reference to the closing price at
which the stock was sold, was $13,398,081.
As of March 15, 1996, 5,285,975 shares of Common Stock were
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
The Exhibit Index is located on pages ________ - ________.
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PART I
Item 1. Description of Business
GENERAL
DESCRIPTION OF COMPANY
DRCA Medical Corporation is a Texas corporation which was formed on April 1,
1990 as a successor corporation ("DRCA" or the "Company"). The Company has
organized its operations through wholly and majority-owned subsidiaries and
affiliates controlled through contract and otherwise.
DESCRIPTION OF SERVICES
DRCA is a Physician Practice Management ("PPM") company specializing in
orthopedics, orthopedics-related and occupational medicine patient services,
including the managed occupational health care program developed by DRCA and
marketed on behalf of the medical practices it manages. DRCA's business
strategy is to manage medical practices which serve industry's need for cost
effective occupational health cost management through the provision of a broad
continuum of health care services in selected geographic markets. The Company
currently operates a mixture of fixed and mobile, orthopedic, occupational
medicine, diagnostic, rehabilitation, and work hardening centers under
management contract arrangements. These operations provide a broad range of
orthopedic and occupational health care services to prevent, diagnose, treat and
rehabilitate on-the-job and other injuries and illnesses. These services are
designed to provide a cost advantage over traditional hospital and workers'
compensation treatment methods through lower total health care expenditures and
fewer lost work days.
The Company currently operates a total of three orthopedic clinics, three work
hardening clinics, eight physical/occupational therapy centers, two magnetic
resonance imaging centers, eight occupational and urgent care medicine clinics,
seven mobile testing units and one chronic pain treatment center in Houston,
Texas, and Little Rock and North Little Rock, Arkansas.
The Company's programs include ergonomic and preventative health consulting,
screening, health status monitoring, diagnostic, treatment, and rehabilitation.
These programs provide employers the necessary tools to minimize on-the-job
injuries through ergonomic consulting, work station design, job task analysis,
injury prevention and pre-placement health and physical capacity screening.
They also assist employer clients to comply with the requirements of the
Americans With Disabilities Act ("ADA"), the Occupational Health and Safety
Administration ("OSHA"), and the Department of Transportation ("DOT"). Services
include individually structured diagnostic, treatment and rehabilitation
programs for patients experiencing disabilities due to a variety of physical or
orthopedic problems principally related to musculoskeletal disorders common to
on-the-job injuries. These programs are designed to speed recovery and return
the patient to employment at the earliest date possible, thus providing cost
savings to both employers and insurance companies over traditional health care
services. Services are provided to employers which are both subscribers and
non-subscribers to workers' compensation insurance. The Company's facilities
also accept patients who are members of preferred provider or managed care
organizations. Additionally, revenues are also derived by the medical groups
from services to personal injury patients and, to a small extent, from patients
covered under Medicare.
The three work hardening clinics are located in Houston, Texas. These clinics
take a multi-disciplinary approach to work hardening and rehabilitation by
employing physical therapists, occupational therapists, psychologists,
vocational counselors, psychosocial facilitators, exercise physiologists and
nutritionists to treat the full range of patient needs. Work hardening is an
individual, work-oriented treatment process involving
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the patient in simulated or actual work tasks designed to progressively increase
physical tolerance, stamina, endurance and productivity with the objective of
improving employability and returning the patient to employment at the earliest
date. The work hardening program addresses the physical, psychological and
social condition of the injured worker and his ability to work. This approach
targets industry's need for injury prevention and injury rehabilitation. A
typical clinic program consists of up to eight hours per day, five days per week
for a period of up to eight weeks of treatment. A transition program of one to
two weeks may also be utilized for individuals who require physical
reconditioning before entering the work hardening program.
The eight physical/occupational therapy centers employ professionally trained
staffs which render rehabilitative services based on standardized treatment
modalities. These centers provide comprehensive therapy services designed to
restore the physical well-being of the patient, including both physical and
occupational therapy. The Company has broadened the scope of services available
in some of the physical/occupational therapy centers to include computerized
pre-employment and physical capacity evaluations. In addition to orthopedic
cases, medically stable neurologic, geriatric and psychiatric patients have been
treated. By selectively broadening the scope of the services offered at its
managed clinics, the Company's managed occupational health care program is able
to offer a more comprehensive package.
The Company has contracted with a hospital chain to operate the physical and
occupational therapy departments on two hospital campuses. In addition, DRCA
provides the physical therapy and occupational therapy components of the
hospitals' skilled nursing facility and its geriatric psychology unit.
DRCA operates two magnetic resonance imaging centers, one in Houston, Texas and
one in Little Rock, Arkansas. The Houston unit commenced operations in
September, 1990 and is presently operated under the terms of the management
contract with the Houston medical group. The Little Rock center opened in
March, 1993 and is operated by a subsidiary of DRCA. These units provide
magnetic resonance imaging studies primarily to orthopedists and neurologists
for use in diagnosis and planning of surgery or other treatment. A significant
portion of the Houston unit's revenues are derived from patient referrals from
orthopedic specialists who treat personal injury patients.
DRCA acquired a network of four occupational/urgent care clinics in Little Rock
and North Little Rock, Arkansas in January 1992. These clinics specialize in
occupational, general and family medicine. Two of the physical therapy centers
managed by DRCA are located inside two of these occupational/urgent care clinics
located in Little Rock and North Little Rock.
DRCA opened an occupational medicine clinic in Houston, Texas, in November,
1992, and acquired the assets of a Houston based network of three occupational
medicine clinics and six mobile health testing units in January, 1993. It also
acquired the occupational and industrial medicine component of a medical
practice and physical therapy clinic in northwest Houston in July, 1993.
In July, 1993, DRCA opened a chronic pain treatment center. This center, which
is now a part of the Houston medical group, offers psychological, cognitive,
physical conditioning and rehabilitation and vocational services to chronic pain
patients. Treatment at this facility may be appropriate for patients who are
unable to participate in work hardening due to their pain, and as such,
represents another critical link in the Company's comprehensive program.
In March 1995, DRCA reorganized its Houston operations whereby substantially all
medical and ancillary services are provided by a medical group practice
affiliated with the Company. In connection with this reorganization, DRCA
entered into a long term management services agreement with a newly formed
medical group in Houston, Texas. At its inception, this group included the
Houston-based non-medical, ancillary and
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rehabilitation services previously provided directly by DRCA, the occupational
medicine component of the managed occupational health care program previously
provided by a professional medical association under management contract with
DRCA, and two orthopedic clinic locations. In this regard, the Company assisted
in the formation of this professional limited liability partnership ("PLLP") and
all regional medical and ancillary services in Houston have been consolidated
within the PLLP. This structure is designed to streamline the Company's billing
and collection procedures as well as provide a vehicle through which to contract
all services with managed care payors. It is the intention of the Company and
its affiliated medical groups to comply with federal and state laws which
prohibit the corporate practice of medicine, referrals by physicians to certain
ancillary services in which the physician has a financial interest, and kick
backs (or payments to physicians for patient referrals). The new legal structure
was designed to address these prohibitions.
Also in March 1995, William F. Donovan, M.D., an orthopedic surgeon and a
Director and shareholder, became affiliated with the group through Northshore
Orthopedics Assoc., a professional medical entity owned by Dr. Donovan. Since
March 1995, Dr. Donovan has effectively practiced full time orthopedic medicine
services through the group under an arrangement where Dr. Donovan receives a
base salary and a bonus based on cash collections.
An orthopedic surgeon who specializes in spinal reconstruction contracted to
join the new medical group in November, 1995.
With the addition of these physicians and facilities in 1995, the Company is
able to provide a more comprehensive managed care solution to reducing workers'
compensation expense and industrial health care costs while also setting the
stage to expand the business through the consolidation of orthopedic and related
medical practices. DRCA's near term growth strategy includes continuation of
its vertical integration strategy through physician practice management programs
in orthopedics and orthopedics-related medical specialties in conjunction with
its managed occupational healthcare program, expansion of services at existing
and acquired locations, and the continued development in targeted geographical
markets of a broad base of referral sources among physicians, employers, and
payors.
DRCA's long term plans are to expand its operations based upon the consolidation
of orthopedic practices and related medical specialities and upon the continuing
development of a managed care, cost containment program for industrial health
and workers' compensation costs in selected geographic markets. The Company
plans to grow through expansion of its physician practice management programs
into orthopedics-related medical specialties and through the acquisition or
start up of occupational medicine clinics and the subsequent addition of its
diagnostic, rehabilitation and managed care services. Orthopedic practices are
uniquely positioned to provide patient referrals to the ancillary services on
which DRCA was founded and which are now included in the affiliated group
practice managed by DRCA. The managed occupational health care programs and
industrial medicine relationships which DRCA has developed are sources of
patient referrals to orthopedic practices. These synergistic relationships
provide the platform for DRCA's long term expansion plans.
DRCA expects to pursue its expansion program by consolidating orthopedic
practices in both new and existing geographic markets. Because of its
significant experience in orthopedics-related medical services, DRCA believes it
holds a competitive advantage in negotiating for the consolidation of these
practices. The Company expects to increase the scope of an orthopedic practice
by implementing rehabilitation, diagnostic imaging, and pain treatment programs
based upon the profile and volume of the group's existing patient base. In
markets where DRCA already operates its managed occupational health care
program, orthopedic practices should benefit from the patient referrals the
program generates. New geographic markets which are opened through orthopedic
expansion afford DRCA the opportunity to expand the managed occupational health
care program if employer demographics indicate it is appropriate to do so.
Targeted geographic areas for expansion will
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be those with well established, reputable orthopedic or related medical
specialty practices with which the Company could affiliate through acquisition
of their non-medical assets and entering into long-term management services
agreements with the practices. Targeted areas should, ideally, also possess a
high incidence of workers' compensation claims, favorable workers' compensation
reimbursement rates, available qualified professionals to staff the facilities
and other favorable demographic factors such as population density and projected
growth rate, although expansion through orthopedic consolidation is not limited
to only such areas.
The Company also intends to selectively expand its network through the
establishment of joint ventures, strategic alliances and management contracts
with major health care service providers, workers' compensation insurance
carriers, and strategically appropriate merger candidates.
WORKERS' COMPENSATION OVERVIEW
State mandated and regulated workers' compensation programs require that
employers assume responsibility for medical services, lost wages and other costs
resulting from occupational injuries and illnesses. Workers' compensation
programs are intended to provide medical benefits to injured workers regardless
of relative fault. In most states, costs incurred by employers are insured
through state-sponsored funds, private carriers, or self-insurance.
Texas is one of three states (along with New Jersey and South Carolina) in which
participation in a state-approved workers' compensation program is not
mandatory. In practice, however, the great majority of employers do provide
workers' compensation coverage to their employees because of the risks
associated with potential lawsuits from injured employees.
Workers' compensation costs are comprised of two components - medical costs and
disability costs. Generally the workers' compensation mandate requires that an
on-the-job injury be treated at no cost to the injured employee and that the
injured employee receive compensation while disabled to partially offset lost
wages. Historically, both components of workers' compensation costs have been
abused as a result of little, if any, oversight regarding the amount, type or
duration of medical treatment of on-the-job injuries. Therefore, both the cost
of medical services and the length of disability payments contributed to the
cost increases experienced for the past several years. These costs are
estimated by various sources to have exceeded $70 billion in 1992. Such costs
totaled only $6 billion in 1972 and, as they are projected to increase by 13% to
15% per year, may reach $150 billion per year by the end of the decade. Rapidly
increasing costs have made managed care methodologies, such as those developed
by DRCA, increasingly attractive. At present, management estimates that no more
than approximately 25% of injured workers are covered by managed care programs.
Approximately forty percent of current costs, or $28 billion, was paid for
medical expenses, and such expenditures are projected by industry sources to
approach 50% of total costs within five years. Managed care and cost
containment methodologies have been tested in the workers' compensation
environment and have yielded health care cost savings of 25% to 40%, a potential
savings of at least $7 billion. A two-year study undertaken by the Florida
Department of Insurance, completed in 1993, concluded that a managed care
approach to workers' compensation claims resulted in a 38.5% reduction of total
claim costs.
Disability payments accounted for 60%, or $42 billion, of workers' compensation
costs in 1992. Accordingly, managed care's emphasis on quickly returning
injured employees to work could yield potentially significant disability cost
savings. For cases severe enough to require work hardening treatment, DRCA's
WorkWell centers historically have a 92% rate of case closure and an 85% return-
to-work rate after only 4.1 weeks of
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treatment, which is significantly better than the industry average of
approximately a 60% return-to-work rate after as much as eight weeks of therapy.
Current state workers' compensation systems reform initiatives are focusing on
cost containment through implementation of managed care methodologies. It is
generally anticipated that the implementation of these initiatives will result
in increased patient flow and improved reimbursement for primary and
preventative care providers such as these managed by DRCA.
According to industry sources cited in REHAB Management, for every workers'
compensation premium dollar collected, insurers on average pay out $1.18 in
claim costs. This funding deficit has caused many insurers to consider leaving
states that do not adequately fund or have made no effort to reform their
respective systems. Because rate increases are politically unpopular, state
lawmakers have proven reluctant to increase rates. According to the Workers
Compensation Research Institute, state workers' compensation system reforms
under consideration include many of the following options: (i) requirements that
employees seek medical care from state-regulated managed care networks; (ii)
utilization review; (iii) payment reforms; (iv) flexible deductible options,
allowing the employers a greater voice in managing worker injury costs; (v)
greater reliance on the judgment of the treating physician in the settlement of
disputes rather than reliance on outside experts; and (vi) the concept of 24-
hour coverage, in which both the employee's and employer's costs and incentives
are similar regardless of whether the claim is associated with workers'
compensation or group health insurance. As outlined in President Clinton's
health reform plan presented to Congress in September 1993, the future of all
payments to providers, whether for workers' compensation or group health
insurance, will likely be in the form of monthly capitation payments. This
prepaid model offers the greatest opportunity to reverse the current incentive
structure that exists for providers to increase the volume of services; however,
no recent action on healthcare reform has taken place.
In May 1993, Minnesota became the first state to implement a managed care
approach to the management of workers' compensation medical costs by (i)
allowing employers to require that injured workers seek care from a managed care
network; (ii) authorizing the use of medical management and utilization review
techniques; and (iii) imposing a new fee schedule to cut payments for medical
services by 15% overall. According to the Workers Compensation Research
Institute, 21 states now limit a worker's initial choice of medical provider, 14
states encourage the use of utilization-management techniques to ensure that
only necessary services are rendered, and 27 states have imposed fee schedules
that set maximum reimbursement rates for providers.
Prior to this legislation, Minnesota had attempted to manage workers'
compensation costs with a fee schedule alone. A 1990 state study found that
providers, on average, charged twice as much to treat workers' compensation
injuries as they did for identical injuries not covered under workers'
compensation. The study also found that without utilization management,
providers can circumvent the intent of a fee schedule by simply ordering more
treatment.
Texas and Arkansas workers' compensation commissions both currently utilize a
fixed fee schedule to control health care benefits to beneficiaries. Texas also
requires pre-certification for certain procedures. Arkansas has recently
mandated a "Managed Care Organization" ("MCO") model similar to the Minnesota
model discussed above. Arkansas has also recently passed "Any Willing Provider"
legislation which prohibits managed care payors from excluding any provider who
is willing to accept the payor's fee schedule. Once in place, the Company
believes the incentives in the MCO model in conjunction with the Any Willing
Provider legislation will tend to direct more patients to the Company's centers.
DRCA's managed care philosophy addresses these key concerns with or without
legislative mandate. The success of DRCA's managed occupational health care
strategy will be in its ability to become a cost
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containment partner with its industrial clients. By building client
relationships based on cost containment through injury prevention, screening of
high risk job applicants, periodic medical surveillance, and proven return-to-
work outcomes at a cost effective fee structure, DRCA's managed care strategy
addresses for its clients the very legislative issues pending in state
government.
Management believes that DRCA's managed care strategy has been validated, not
only by the Company's competitive position, but by recent regulatory trends and
industry studies that show the efficacy of a managed care approach to workers'
compensation cost containment. The group health insurance industry has taken
great strides toward the implementation of managed care methodologies, while
such methodologies are relatively new to, and rarely implemented in, the
workers' compensation industry. Current regulatory trends imply that workers'
compensation service providers such as those managed by DRCA will be required to
implement managed care methodologies at an accelerated pace. Management
believes that successful providers will be those that already have implemented
managed care methodologies and successfully demonstrated the value of their
services to payors.
PHYSICIAN PRACTICE MANAGEMENT ("PPM") OVERVIEW
DRCA has identified the consolidation of orthopedic and orthopedic-related
practices as a potentially significant growth opportunity within the PPM
marketplace. Pioneered in the late 1980's, PPM companies offer a mechanism by
which physicians can "partner" with corporate entities. The physician's
practice benefits from the management talent, business skills, operating
structures, business systems, economics of scale, and access to capital of its
corporate partner. The PPM company benefits from potentially significant growth
through expanding numbers of practice management contracts and increasing
management fees.
The early 1990's saw the emergence of PPM as a significant segment of the health
care industry. Alex. Brown and Sons Incorporated attributes this emerging
industry to four key elements:
(i) The complexity of having numerous managed care contracts with
multiple insurance carriers called for billing and collections systems more
sophisticated than an average physician could afford or manage.
(ii) The increasing cost and sophistication of medical equipment
required greater capital resources and more professional purchasing systems than
that available to the average physician.
(iii) The increasing penetration of managed care payors diminished
the influence of solo practitioners and small, isolated groups.
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(iv) The uncertainty of health care reform made group practice a more
attractive alternative.
Physicians provide approximately $200 billion annually in personal services to
patients, and control an estimated $700 - 800 billion in health care
expenditures by deciding what non-physician health care services and products
are required by their patients.
The PPM industry has tapped this vast pool by consolidating both single- and
multi-specialty practices for the mutual benefit of the physicians and the
shareholders of their corporate "partners".
Although structures vary, PPM companies generally do not provide medical
services. Instead, the medical services are provided by medical group practices
which contract with the PPM company on a long term basis. The PPM company
generally acquires the hard assets of the medical groups with which it contracts
and structures its provision of those assets and its management services in such
a way as to promote a long term relationship with the medical groups it manages.
OPERATIONS
MANAGED CARE PROGRAM
The Company's current strategy is to operate managed care programs for treating
workers' compensation injuries and other occupational medicine patients through
medical facilities and other contracted health care providers in selected
geographic markets. The Company has entered into agreements with professional
medical groups to provide medical services (See "Regulation" in this Item 1).
The Company's orthopedic and occupational medicine clinics enhance DRCA's and
the medical group's ability to provide comprehensive health services which
address employers' needs with respect to workers' health and wellness, injury
prevention, emergency treatment of injuries, case management of injured workers,
and health maintenance through periodic health involvement. The occupational
medicine clinics act as the entry point to the delivery of health care and are
expected to generate referrals to other DRCA facilities and other contracted
providers.
The occupational managed care program allows the Company and the medical groups
to provide and oversee objective treatment for an employer's injured worker with
the goal to return the patient safely back to work in the shortest medically
appropriate time. This approach enhances the quality of care, minimizes lost
work time and reduces overall costs related to injured workers. The Company's
occupational managed care program, together with the medical services provided
by the medical groups, is designed to provide preventative services, treatment
of occupational injuries, specialty care, billing review and peer review. The
Company is also developing a quality control and utilization review system
consisting of prospective, concurrent and retrospective review of medical
service utilization within its managed care program. The program also includes
timely communications with employers, insurance carriers and network providers.
WORK HARDENING CLINICS
The Company currently operates three wholly-owned work hardening clinics in
Houston, Texas under the trade name "WorkWell." The physical plants of these
three clinics are the property of the Company and are provided to the Houston
medical group pursuant to a long term management services contract.
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Work hardening therapy is a program centered around state-of-the-art facilities
with a philosophy based on a comprehensive, multidisciplinary approach to
industry's need for injury prevention and injury rehabilitation. In view of the
constantly increasing cost of work-related injuries, the Company believes that
responsible care is necessary at both the pre-injury and post-injury level.
Each work hardening clinic's staff is trained in specialized evaluation,
treatment techniques, ergonomic evaluation and injury prevention.
Work hardening addresses the physical, psychological and social aspects of an
injured worker's ability to work. This program is carried out in a job
simulated environment. A typical program consists of up to eight weeks, five
days per week, eight hours per day. Patients who require physical conditioning
prior to undertaking the work hardening program may receive "transitional"
treatment up to two weeks at a work hardening clinic. The work hardening
program requires the worker to perform the tasks he would usually perform in his
job, provides cardiovascular conditioning, and strength and flexibility
conditioning. The program re-educates workers on how to use their tools and
perform their tasks in a safer manner. The goals are to (i) increase physical
work tolerance, endurance, and productivity, (ii) provide an early return to
work, and (iii) improve the injured worker's employability. Accordingly, the
patient assumes an active role in the management of his/her individual case.
The work hardening clinics conduct an objective and standardized evaluation of
physical function. The evaluation utilizes the ERGOS work simulator, a fully
integrated computerized instrument, to measure physical capabilities as they
relate to work activity. The ERGOS work simulator produces graphic and
narrative reports that compare the injured patient's physical capabilities with
national standards promulgated by the Department of Labor.
The work hardening clinics can also provide pre-employment screening. This
screening can decrease injuries by placing the employee in the proper job. In
addition, the work hardening clinics provide vocational rehabilitation which
addresses the patients' ability to meet the physical demand of a specific job.
The work hardening clinics' injury prevention and wellness programs help
instruct employees in techniques to prevent injury and maintain health while on
the job. This program also includes classes in back care, stretching, smoking
cessation, and dietary consultation and stress management. Staff personnel also
offer recommendations which can modify or alter the demands on the worker or the
demands of the job which may ultimately prevent on-the-job injury.
One area of potential growth is vocational evaluation services. The
comprehensive vocational evaluation program is a 2-6 week program designed to
assess and predict disabled individuals' vocational interests and potential
aptitudes through various techniques to reveal possible employment opportunities
and training programs. WorkWell in Houston, Texas, has been designated by the
Texas Rehabilitation Commission to serve as one of its evaluation sites for the
performance of vocational evaluations.
Presently, the three Houston work hardening clinics hold the highest three-year
certification given by the Commission on Accreditation of Rehabilitation
Facilities ("CARF"). Upon receipt of this certification, WorkWell was the only
network of work hardening centers to have all locations certified at the three-
year level. The Texas Workers' Compensation Commission ("TWCC") has recognized
the quality of care inherent in a CARF-certified work hardening program.
Effective April 1, 1996, TWCC almost doubled the reimbursement paid to CARF-
certified work hardening centers. WorkWell staffing includes varying
combinations of licensed occupational therapists, licensed physical therapists,
certified occupational therapy assistants, exercise physiologists, work
hardening supervisors, vocational specialists and licensed social workers. In
addition, each WorkWell Clinic has available a psychologist and a nutritionist.
The Company also has arrangements with, and can refer patients to, medical
doctors and registered nurses should the need arise.
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PHYSICAL/OCCUPATIONAL THERAPY CLINICS
The Company currently operates four hospital-based physical and occupational
therapy departments/programs, one free standing physical therapy center and five
physical/occupational therapy programs which are located within other clinic
facilities. The hospital-located physical and occupational therapy programs are
operated pursuant to hospital management contracts.
The Company's physical therapy centers provide a broad view of health care,
emphasizing the preventive, acute/trauma and rehabilitative health care needs of
the patient. Each physical/occupational therapy center is committed to
restoring the patient in chronic pain, or with musculoskeletal disorders, to a
healthy, normal life. The services generally include physical and occupational
therapy, with primary emphasis on musculoskeletal disorders. To a lesser
extent, the physical/occupational therapy centers treat and instruct injured
patients on how to use prosthetic and orthotic devices.
Presently, the physical and occupational therapy centers are staffed with
varying combinations of licensed physical and occupational therapists, licensed
physical and occupational therapy assistants and unlicensed physical and
occupational therapy aides.
The Company also has arrangements with independent contractor therapists in
Houston, Texas, to cover temporary absences of center personnel, assist during
peaks in patient loads and assist the Company in training and maintaining
quality control. These independent contractor therapists are paid by the
Company only when hired to provide services. The Company also has arrangements
with, and can refer patients to, medical doctors and registered nurses.
MAGNETIC RESONANCE IMAGING ("MRI") CENTERS
The Company currently operates one MRI center in Houston under the name of
Spectrum Imaging Centers. This unit operates a Hitachi MRP-20 unit which
performs a full range of diagnostic studies involving magnetic resonance
imaging. Patients are referred to the MRI center primarily by orthopedists and
neurologists, working often with patients who originate from attorney referrals
and DRCA's managed care program and, to a lesser extent, preferred provider
organizations and health maintenance organizations.
The Company opened an MRI center in Little Rock, Arkansas on March 10, 1993,
operating under the name Spectrum Little Rock Imaging. This center is located
on the first floor of a professional building adjacent to a major Little Rock
hospital. It operates a Shimadzu SMT-100X unit to perform a full range of
magnetic resonance imaging studies.
The Centers are staffed by licensed radiologic technologists who have received
specialized training in magnetic resonance imaging, and clerical personnel.
Also, licensed radiologists are utilized in third-party contractor arrangements
to interpret the studies and prepare reports for the referring physicians.
MOBILE TESTING
The Company operates seven mobile testing units designed to meet industry's
demands for on-site compliance with medical surveillance required by OSHA and
other regulatory agencies. Mobile testing services currently
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include hearing testing, heart and lung testing, drug screen specimen
collection, X-ray, EKG's and physical examinations by physicians.
CHRONIC PAIN TREATMENT CENTER
The Company has operated a chronic pain treatment center since July 1993. This
center offers psychological, cognitive, physical conditioning and
rehabilitation, and vocational services to chronic pain patients. Treatment at
this facility may be appropriate for patients who are unable to participate in
work hardening due to their pain, and the ability of the Company to provide this
treatment represents another critical link in the Company's comprehensive
managed occupational healthcare program.
ORTHOPEDIC MEDICINE
In March, 1995, the Company facilitated the creation of a medical group practice
in Houston, Texas which consolidated all medical and ancillary services
previously provided by DRCA and its affiliated medical group with two orthopedic
clinics. Patients are seen at the orthopedic clinics for a variety of
musculoskeletal illness and injuries. Orthopedic surgery is the source of a
significant portion of the revenues of these two clinics. In November, 1995, the
medical group contracted for the services of another orthopedic surgeon who
specializes in spine surgery, a procedure which is often required in workers'
compensation injury cases.
MARKETING
DRCA presents itself to the market through professional health care marketing
staffs in its service areas. DRCA follows the strategy of marketing its services
both on a stand-alone basis and as part of its managed care program. There are
presently 9 full-time marketing professionals calling on referral sources in the
industrial, insurance, and medical communities. Responsibilities of the
marketing staff are divided into market segments:
. Industrial/managed care: Industrial/managed care representatives call on
current and prospective industrial and insurance clients. Their primary focus
is marketing DRCA's managed care program. They also promote the individual
services at all DRCA locations.
. Referring physicians: Physician referrals to DRCA's ancillary services
such as MRI, physical therapy, work hardening and chronic pain treatment are
promoted by this marketing group. This group makes regular calls on physicians
both within and outside DRCA's managed care network, promoting DRCA's clinical
expertise.
. Mobile health testing: Mobile health testing accounts are serviced through
a dedicated sales effort. Contract renewal, prospecting, cross-selling, and up-
selling are the primary objectives in marketing this segment of DRCA's business.
. PPO/HMO Contracting: The Company has also dedicated marketing personnel to
the task of contracting DRCA's clinics and centers with both workers'
11
<PAGE>
compensation and group health preferred provider and health maintenance
organizations.
EMPLOYEES
At March 15, 1996, the Company and its affiliated medical groups had
approximately 153 full time employees and approximately 10 part time employees.
None of the Company's employees are covered by collective bargaining agreements.
COMPETITION AND MAJOR CUSTOMERS
The business in which the Company competes is subject to numerous competitive
factors which include price, quality, reliability and market acceptance. In
general, the Company's business is intensely competitive, and there can be no
assurance that other companies will not provide additional competition to DRCA's
services. The Company faces competition from numerous sources including, but not
limited to, (i) local hospitals, physicians, chiropractors and private practice
therapists working individually or together; (ii) specialty local and national
providers of narrow-range services such as sports medicine, cardiac
rehabilitation and back pain management; (iii) national comprehensive outpatient
rehabilitation facility companies; (iv) national health care service
corporations; and (v) other physician practice management companies. Many of
the Company's competitors have greater financial resources than the Company. As
the general interest in the PPM market and in controlling occupational health
costs increases, the Company believes competition will increase. The Company
believes it is a major dedicated provider of occupational health care programs
in the Houston, Texas market, and maintains a strong position in the Little
Rock, Arkansas market.
At December 31, 1995, the Company provided substantially all of its services
through affiliated medical groups in Texas and Arkansas which have a total of
ten full-time and two part-time physicians. The loss of the services of any of
the physicians could have a material effect on the Company's revenues. In 1995,
the medical services provided to the medical groups' patients by William F.
Donovan, M.D., a Company shareholder and director, was 16% of the Company's
revenues. The Company operates four physical and occupational therapy programs
under contract with a hospital corporation. These programs provided
approximately 6%, 10% and 12% of the Company's revenues in 1995, 1994, and 1993,
respectively.
TRADEMARKS
The Company obtained a certificate of trademark and service mark registration
for the "WorkWell" and the WorkWell design from the State of Texas in January
1990. These marks are registered for a term of ten years, and can be reserved
for an additional ten-year period.
The Company obtained Certificates of Registration on the Principal Register of
the U.S. Patent and Trademark Office on March 17, 1992 for the mark "Work
Hardening Dynamics" and on April 7, 1992 for the "Work Hardening Dynamics"
design logo. These marks are registered for a term of ten years, and can be
reserved for an additional ten-year period.
The Company obtained Certificates of Registration on the Principal Register of
the U.S. Patent and Trademark Office on January 19, 1993, for the mark "Medi-
Stat" and on May 11, 1993 for the "Medi-Stat" design logo. These marks are
registered for a term of ten years, and can be reserved for an additional ten-
year period.
12
<PAGE>
The Company obtained Certificates of Registration on the Principal Register of
the U.S. Patent and Trademark Office on September 12, 1995, for the mark "DRCA".
This mark is registered for a term of ten years, and can be reserved for an
additional ten-year period.
WORKERS' COMPENSATION, MEDICARE, MEDICAID, PERSONAL INJURY
AND COMMERCIAL INSURANCE
Currently, the services rendered through the occupational/urgent care clinics
are generally covered by employers, private insurance, workers' compensation
insurance and to a lesser extent, Medicare or Medicaid. The clinics provide an
insignificant amount of services under Medicare and Medicaid programs. The
Company is not actively marketing its program to Medicare and Medicaid patients.
The Company believes that workers' compensation insurance generally covers the
services rendered by the work hardening clinics. Neither Medicare nor Medicaid
covers work hardening or other services rendered through the Company's work
hardening clinics. Moreover, the Company believes that private medical
insurance, generally, does not cover the work hardening services of the work
hardening clinics, although certain specific rehabilitation protocols may be
covered if not provided as part of a work hardening program.
Revenue derived from services provided to personal injury claimants, as a
percent of revenues, was 16% in 1995, 12% in 1994 and 7% in 1993. Typically,
personal injury claimants have injuries similar to those of workers'
compensation injury patients and are pursuing settlement or damage awards
through the judicial system. Due to the judicial backlog of such cases and
related factors, revenues related to personal injury claimants may take up to
two years to collect.
The services rendered through the physical and occupational therapy centers are
generally covered by Medicare, Medicaid, private insurance and workers'
compensation insurance. Presently, only the hospital-based physical and
occupational therapy programs are certified by Medicare or Medicaid.
The services rendered by the MRI centers are generally covered by workers'
compensation or private insurance. The units are certified by Medicare, but
provide an insignificant amount of services under this program.
Treatment at the chronic pain treatment center may be covered by workers'
compensation insurance, private insurance, Medicare and Medicaid.
Orthopedic medicine services are normally covered by all payors, including
Medicare and Medicaid. Although it is a relatively small percentage of their
revenues, the orthopedic clinics typically see more Medicare beneficiaries than
do the other types of clinics.
Workers' compensation rates in Texas and Arkansas typically reimburse for
medical services at approximately 80-90% of usual and customary charges.
REGULATION
Fee-Splitting; Corporate Practice of Medicine. The laws of many states prohibit
physicians from splitting professional fees with non-physicians and prohibit
non-physician entities, such as the Company, from practicing medicine and from
employing physicians to practice medicine. The laws in most states regarding
the corporate practice of medicine have been subject to limited judicial and
regulatory interpretation. Independent physician groups provide medical
services at the Company's locations. Relying on the advice of counsel, the
Company has structured its agreements with the physician groups to avoid the
exercise of control by the Company over the provision of medical services by the
physician groups and to comply otherwise with applicable laws. The Company
believes its current and planned activities do not constitute fee-splitting or
the corporate practice of medicine as contemplated by these statutes or case law
interpretations. However, there can be no assurance that
13
<PAGE>
future interpretations of such laws will not require structural and
organizational modifications of the Company's existing relationships with
physician medical practices. In the event of a different or unfavorable
interpretation of the laws relating to relationships such as those between the
Company and the physician groups, the Company's business could be adversely
affected.
Medicare Fraud and Abuse Provisions. A federal law (the "Anti-Kickback Law")
prohibits the offer, payment, solicitation, or receipt of any form of
remuneration in return for the referral of Medicare or state health care program
patients or patient care opportunities, or in return for the purchase, lease, or
order of any item or service that is covered by Medicare or a state health care
program. Pursuant to the Anti-Kickback Law, the federal government has
recently announced a policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse relating to Medicare costs. The applicability of these provisions to
many business practices in the health care industry, including the Company's
management agreements, has not to date been subject to judicial and regulatory
interpretation.
The Anti-Kickback Law provides criminal penalties for individuals or entities
participating in the Medicare or state health care programs who knowingly and
willfully offer, pay, solicit, or receive remuneration to induce referrals for
items or services reimbursed under such programs. In addition to federal
criminal penalties, the Social Security Act also establishes the intermediate
sanction of excluding violators from participation in the Medicare or Medicaid
programs.
A violation of the Anti-Kickback Law requires several elements: (i) the offer,
payment, solicitation or receipt of remuneration; (ii) the intent to induce
referrals; (iii) the ability of the parties to make or influence referrals of
patients; (iv) the provision of services that are reimbursable under Medicare or
state health care programs; and (v) patient coverage under the Medicare program
or a state health care program. Management believes that the Company is
receiving compensation under its management agreements for management services.
The Company also believes that it is not in a position to make or influence
referrals of patients or services reimbursed under Medicare or state health care
programs to any physician groups. Consequently, the Company does not believe
that the management fees payable to it should be viewed as remuneration for
referring or influencing referrals of patients or services covered by such
programs as prohibited by the Anti-Kickback Laws. The Company provides only
limited services to Medicare and state health care program patients and does not
pay remuneration to anyone for referrals of those patients.
In 1991, the Inspector General of the United States Department of Health and
Human Services published "Safe Harbor Regulations" defining safe harbors for
certain arrangements that do not violate the Anti-Kickback Laws. One of the safe
harbors specifically provided is a safe harbor for personal services and
management contracts. Under this safe harbor, "remuneration" prohibited by the
Anti-Kickback Laws does not include any payment made by a principal to an agent
as compensation for services of the agent as long as certain standards are met.
To management's knowledge, there have been no agency interpretations or case law
decisions involving management agreements similar to the Company's that would
indicate that such agreements do not fall within a safe harbor. The Company
does not provide significant services to Medicare and state health care program
patients and believes that its activities are structured to fall within the safe
harbor guidelines.
Prohibitions on Certain Referrals. The so-called "Stark Law" (named after its
chief sponsor, Congressman Fortney "Pete" Stark) originally prohibited a
physician from referring a Medicare patient to an entity for the provision of
clinical laboratory services if the physician or an immediate family member of
the physician had a financial relationship, which includes an ownership or
investment interest or compensation arrangement, with the entity. The revised
Stark Law prohibits a referral by a physician of a Medicare or Medicaid patient
to an entity in which the physician or an immediate family member has a
financial relationship if the referral is for any of a list of "designated
health services" and an exception to the Stark Law does not exist. The list of
designated
14
<PAGE>
health services does not include the management of a physician health care
practice such as the Company provides, but the list does include physical
therapy, occupational therapy, and magnetic resonance imaging. Magnetic
resonance imaging is the only designated health service directly provided by the
Company and the magnetic resonance imaging facility has no prohibited financial
relationships with any referring physicians. In response to the Stark Law, the
Company has eliminated physician financial interests in all operating
facilities. The Company believes that its management services are provided to
physicians at fair market value and would therefore be excepted from a
disqualifying financial relationship. The designated health services provided
by the physician groups managed by the Company have been structured to comply
with the group practice exceptions under the Stark Law. However, no regulations
for the Stark Law (except for clinical laboratory services) have been
promulgated by the regulatory and enforcement agency of the Stark Law.
Therefore, the Company cannot predict how enforcement or interpretation of the
Stark Law will be handled. A determination of the applicability of the Stark
Law could have a significant adverse effect on the Company.
Certificate of Need. Several states require that providers of health care
obtain a Certificate of Need ("CON") prior to commencement of construction
and/or operation. While the Company's development plans presently emphasize
operations in non-CON states and several states in recent years have
discontinued their CON programs altogether, there is no assurance that some or
all of these states may not at some future time institute such programs. In
addition, the Company may elect in the future to operate in CON states. As a
result, CON regulations may have an adverse affect on the Company's expansion
policy.
Accreditation. The Commission on Accreditation of Rehabilitation Facilities
("CARF") is an independent organization that reviews rehabilitation facilities
and accredits those facilities that meet its guidelines. While participation in
the CARF accreditation is currently voluntary, some states have passed
legislation requiring that certain workers' compensation treatment be provided
by CARF-accredited facilities. Currently, all three of the Company's work
hardening clinics are accredited by CARF at the highest (three year) level.
(See Work Hardening Clinics under Item 1.)
Regulatory Compliance. The Company believes that health care regulations and
statutes will continue to change and, as a result, it regularly monitors
developments in health care law. The Company expects to modify its agreements
and operations from time to time as the business and statutory and regulatory
environment changes. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable laws, there can be
no assurance that its arrangements will not be successfully challenged in the
future.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property. All clinic facilities are leased at
commercial property rates for the size, location, and tenant finish included in
the lease. Clinic facilities range in size from 1,500 square feet to 11,500
square feet and all facilities are of a size and configuration and house various
types of equipment appropriate to the services rendered within the facility.
All facilities are on or near major thoroughfares serviced by public
transportation, are insured and are maintained in good operating condition.
(See Note K, Related Party Transactions)
The Company leases approximately 4,600 square feet in Houston, Texas which
houses the Company's Houston regional office and executive offices. The Little
Rock regional office is located in approximately 1,150 square feet of leased
space adjacent to one of the Little Rock Medi-Stat clinics.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may be subject, from time to
time, to claims and legal actions. While the Company cannot predict the outcome
of litigation actions, it is management's opinion that these matters will not
have a material impact on the Company's financial position or results of
operations. As of March 26, 1996, no actual or unasserted material claims or
actions are pending against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is principally traded on the American Stock Exchange
under the symbol "DRC".
<TABLE>
<CAPTION>
Closing Sales Price
(American Stock Exchange)
-------------------------
Low High
------------ -----------
<S> <C> <C>
1994
- ----
1st Quarter 2 3/4 3 3/4
2nd Quarter 2 15/16 3 3/4
3rd Quarter 2 3/8 3 1/2
4th Quarter 2 1/4 3
1995
- ----
1st Quarter 2 1/4 3 7/8
2nd Quarter 3 1/8 4
3rd Quarter 3 1/16 6 1/8
4th Quarter 2 3/4 4 1/2
1996
- ----
1st Quarter (through March 15, 1996) 4 3/8 4 13/16
</TABLE>
16
<PAGE>
On March 15, 1996, the Company had 152 shareholders of record. A significant
portion of the Company's common stock not held by affiliates of the Company is
held through securities depositories.
The Company has not declared or paid any dividend since it was formed. It is
the present policy of the Company not to pay cash dividends and to retain future
earnings to support the Company's growth. Any payment of cash dividends in the
future will be dependent upon the amount of funds legally available, the
Company's earnings, financial condition, capital requirements and other factors
that the Board of Directors may deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
- ---------------------
The following table presents revenues by category and statement of operations
items as a percentage of total revenues:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Work Hardening/Behavioral Medicine 9.9% 15.8% 21.1%
Physical Therapy 13.4 23.3 22.9
MRI Centers 20.2 18.6 14.6
Occupational/Urgent Care medical services 37.5 42.3 41.4
Orthopedic and surgical services 19.0 0.0 0.0
----- ----- -----
Revenues 100.0 100.0% 100.0%
===== ===== =====
Direct Operating Costs
Compensation costs and medical services 41.8% 38.9% 42.3%
Other direct costs 23.9 25.0 30.1
Selling, General and Administrative 14.0 18.2 23.1
Depreciation and Amortization 7.0 8.7 10.0
Provision for Doubtful Accounts 5.7 2.2 3.1
----- ----- -----
Income (Loss) from operations 7.6% 7.0% (8.6%)
Interest Expense (2.0) (2.3) (2.4)
Minority Interest and Other .2 .3 .78
Benefit from (provision for) Income Taxes (2.4) (1.8) 3.5
----- ----- -----
Net Income 3.4% 3.2% (6.8%)
===== ===== =====
</TABLE>
Year ended December 31, 1995, compared with the year ended December 31, 1994.
- -----------------------------------------------------------------------------
Revenues
Revenues in 1995 increased by $2,650,531 or 20.6% over 1994. The increase in
revenues was mainly due to two orthopedic clinics added to the medical group in
March, 1995. Revenues were also higher at the other Houston medical clinics,
mobile testing, the Houston MRI facility, and the Little Rock occupational
medicine clinics. Revenues from other business units were flat or lower.
Changes in those revenues are generally attributable to changes in the number of
patient visits.
17
<PAGE>
Compensation costs and medical services
Compensation costs and medical services in 1995 increased $1,484,490 or 29.6%
over 1994. This increase is due mainly to the addition of two orthopedic
clinics to the medical group in March, 1995. The increase as a percentage of
revenues was also due principally to higher compensation costs in the orthopedic
clinics compared to other operations.
Other Direct Costs
Other direct costs in 1995 increased $503,545 or 15.7% over 1994, due primarily
to the addition of two orthopedic clinics to the affiliated medical group in
March, 1995. The slight decline in these costs as a percentage of revenues is
primarily a result of the increase in orthopedic services which generally have
less direct costs as a percentage of revenues.
Selling, General and Administrative
Selling, general and administrative expenses in 1995 decreased by $170,285, or
7.3%, from 1994 principally because expenses incurred in 1994 included $259,000
associated with the settlement of two legal proceedings. Other selling, general
and administrative expenses increased by about $88,715. As a percentage of
revenues, selling, general and administrative expenses declined to 14% from
18.2% as a result of the absolute reductions described above as well as
economies of scale.
Depreciation and amortization
The decrease in 1995 of $26,906 is due to the full depreciation of certain older
assets in 1994.
Provision for doubtful accounts
In absolute amounts and as a percentage of revenue, the provision for doubtful
accounts increased in 1995 over 1994 because the allowance percentage for
orthopedic surgery cases billed to third-party payors is higher than the Company
has experienced in the past for third-party claims. Generally, mandated
orthopedic reimbursement rates decline per individual patient as more procedures
are performed.
Minority Interest and Other
Minority interest and other decreased by $7,584, reflecting the minority
partners' interest in the final expenses of the partnerships which were higher
in 1995 by $29,050, and a 1994 gain on the sale of an asset held for sale of
$36,634.
Interest Expense
Interest expense increased by $1,858, or less than 1%. This was due mainly to
slight increases in the prime interest rate which affects the Company's interest
on the term notes and the revolving line of credit with its major lending bank.
18
<PAGE>
Year ended December 31, 1994, compared with the year ended December 31, 1993.
- -----------------------------------------------------------------------------
Revenues
Revenues increased by $1,268,619 or 10.9% in 1994 compared to 1993. Revenues
increased principally due to higher patient volumes at the Houston clinics and
the full year effect of 1993 acquisitions. Revenues at the physical therapy
centers increased due mainly to an increase in patient volume and the full year
effect of the acquisition of a physical therapy clinic in July, 1993. Revenues
were also higher at the Houston MRI center and the pain management clinic, and
at the Little Rock MRI center which opened in March, 1993. Revenues were flat
or lower at the Houston work hardening facilities.
Compensation costs and medical services
These costs increased $89,778 or 1.8% in 1994 versus 1993. Increases relating
to supporting business expansion in Houston and Arkansas were offset by savings
associated with the closing of the Atlanta work hardening facility in July,
1993. As a percentage of revenue, these costs declined principally due to the
closing of Atlanta and MRI services expansion which has lower human resources
costs.
Other direct costs
Other direct costs decreased by $275,849 mainly due to the closing of the
Atlanta work hardening facility in July, 1993. The decline as a percentage of
revenues was a result of the Atlanta closure as well as continued economies of
scale.
Selling, General and Administrative
These costs decreased by $332,871. This was mainly due to (a) decreased legal
fees of $276,260 due to the settling of various legal proceedings, and (b)
decreased expenses related to the uncollectability of accounts receivable from
several discontinued physical therapy and work hardening limited partnerships
($316,746), and (c) expenses incurred in 1994 totaling $259,517 for the
settlement and conclusion of two legal proceedings.
Depreciation and Amortization
Expense decreased by $36,581 in 1994, due to the full depreciation of certain
older fixed assets in 1993.
Provision for Doubtful Accounts
The provision decreased by $77,810 due mainly to a better than expected
collection rate on old accounts.
Minority Interest and Other
Minority interest in income equaled $4,604 for 1994, compared to $88,343 for
1993. This change reflects the winding down of the Atlanta work hardening
limited partnership. In 1994, the Company recorded a gain on the sale of assets
of $36,634.
Interest Expense
Interest expense increased by $17,110 or 6%, due mainly to the increased rate of
interest on the Company's line of credit, which is tied to the prime rate, and
increased interest on the Company's borrowing for the MRI facility in Little
Rock, Arkansas for which interest was due in only three months in 1993.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at December 31, 1995 was $2,654,842 as compared to
$2,379,601 at December 31, 1994, an improvement of $275,241. This is mainly due
to: (1) an increase in net accounts receivable of $1,751,830 due principally to
the increase in revenue and an increased percentage of personal injury cases.
Personal injury accounts receivable increased $907,032 during 1995, increasing
their percentage of net accounts receivable from 39% at December 31, 1994 to 43%
at December 31, 1995. Although currently due, personal injury claims usually
take significantly longer to collect than claims billed to insurance carriers
and employers. Net reimbursement for personal injury claims is generally equal
to or greater than the net reimbursement on other claims; (2) an increase in
accounts payable and accrued liabilities reflecting increased variable costs
associated with the Company's increased revenues of $437,208; and (3) new
borrowings from the Company's major lending bank for equipment and operation
financing, representing a total of $1,160,908 short-term notes due in 1996.
Operating cash flow (defined as net income (loss) plus depreciation and
amortization) was $1.6 million in 1995 and $1.5 million in 1994. A substantial
part of these funds were invested in working capital, principally accounts
receivable, and a total of $183,325 was invested in property and equipment in
this two year period. The Company also utilized a total of $1.4 million in this
two year period in net reductions of debt and capital lease obligations.
On February 6, 1995, the Company executed and funded two credit facilities and
paid off two matured facilities which were in place on December 31, 1994. The
two new facilities included a $750,000 term loan and a $1,000,000 revolving line
of credit. The $750,000 term loan is payable in 48 monthly installments of
$19,061. The facilities were secured by substantially all assets of the Company,
its subsidiaries and its affiliated medical groups and were guaranteed by
certain affiliates.
On January 30, 1996, the Company amended its loan agreement, and increased its
revolving line of credit from $1,000,000 to $2,000,000. The line of credit is
secured by substantially all the assets of the Company and its affiliated
medical groups. The revolving line of credit requires the payment of a 1%
annual fee. Borrowings under the line bear interest at prime + 1.25% and the
line expires January 30, 1997. Advances under the line of credit are subject to
a borrowing base formula under which the Company presently has sufficient
collateral to support the entire line availability. The Company also received
a commitment to fund up to $500,000 in equipment purchases through January 30,
1997, at which time all amounts outstanding under the commitment will convert to
either 3- or 4- year term notes. The line of credit as well as other borrowings
from the Company's major lender are subject to the terms of a loan agreement
which include typical financial ratio covenants and various other provisions.
The Company believes these credit facilities and cash provided by operations
will be sufficient to provide its working capital requirements for at least the
next twelve months for its existing operations. However, to achieve its growth
plans of acquisition of orthopedic practices and related projects, additional
capital is required. The Company is currently exploring a number of
alternatives for additional financing, including equity investment, additional
indebtedness and strategic partnering.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements - Consolidated Financial Statements of DRCA
Medical Corporation as of December 31, 1995 and 1994 and for the three years
ended December 31, 1995:
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants 22
Consolidated Balance Sheet 23
Consolidated Statement of Operations 24
Consolidated Statement of Stockholders' Equity 25
Consolidated Statement of Cash Flows 26
Notes to Consolidated Financial Statements 27-34
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DRCA Medical Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
DRCA Medical Corporation and its subsidiaries at December 31, 1995 and
1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, Texas
March 26, 1996
22
<PAGE>
DRCA MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS December 31,
- ------ ----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 109,231 $ 813,942
Accounts receivable, net 5,552,158 3,800,328
Income taxes receivable 404,717 11,275
Deferred income taxes 141,000
Notes receivable, net 235,801 38,832
Other current assets 147,855 120,157
----------- -----------
TOTAL CURRENT ASSETS 6,449,762 4,925,534
----------- -----------
PROPERTY AND EQUIPMENT
Equipment (including equipment under
capital leases) 5,531,709 5,345,894
Leasehold improvements 437,676 436,624
Furniture and fixtures 368,962 399,120
Vehicles 108,301 108,301
----------- -----------
6,446,648 6,289,939
Less - accumulated depreciation and
amortization (3,999,252) (3,138,962)
----------- -----------
2,447,396 3,150,977
----------- -----------
INTANGIBLES ASSETS, NET 904,161 1,138,257
----------- -----------
OTHER ASSETS 49,620 46,602
----------- -----------
TOTAL ASSETS $ 9,850,939 $ 9,261,370
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $1,166,557 $1,068,939
Accrued expenses 683,868 344,278
Deferred income taxes 208,168
Current obligations under capital leases 139,103 415,487
Current portion of notes payable 1,597,224 717,229
----------- -----------
TOTAL CURRENT LIABILITIES 3,794,920 2,545,933
----------- -----------
NOTES PAYABLE 905,890 1,908,649
OBLIGATIONS UNDER CAPITAL LEASES 117,504 239,097
DEFERRED INCOME TAXES 156,586 158,000
MINORITY INTEREST 51,366
----------- -----------
4,974,900 4,903,045
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 50,000,000
shares authorized, 5,301,808 issued 5,302 5,302
Additional paid-in capital 2,470,570 2,470,570
Retained earnings 2,400,183 1,882,469
Treasury shares, 15,833 shares (16) (16)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,876,039 4,358,325
----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,850,939 $ 9,261,370
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE>
DRCA MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES $15,539,355 $12,888,824 $11,620,205
----------- ----------- -----------
Costs and expenses:
Compensation costs and medical services 6,494,792 5,010,302 4,920,524
Other direct costs 3,720,318 3,216,773 3,492,622
Selling, general and administrative 2,175,528 2,345,813 2,678,684
Depreciation and amortization 1,094,386 1,121,292 1,157,873
Provision for doubtful accounts 893,316 287,270 365,080
----------- ----------- -----------
14,378,340 11,981,450 12,614,783
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,161,015 907,374 (994,578)
Minority interest and other 33,654 41,238 88,343
Interest expense (301,532) (299,674) (282,564)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 893,137 648,938 (1,188,799)
Benefit (provision) for income taxes (375,423) (235,201) 404,252
----------- ----------- -----------
NET INCOME (LOSS) $ 517,714 $ 413,737 $ (784,547)
=========== =========== ===========
Earnings (loss) per common and equivalent share $.10 $.08 $(.15)
=========== =========== ===========
Shares used in per share calculations 5,436,558 5,278,690 5,066,311
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE>
DRCA MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Common Stock
------------------ Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1992 4,855,500 $4,856 $1,388,218 $2,253,279 $(19) $3,646,334
Issuance of common stock:
New issues for cash 312,308 312 730,739 731,051
Acquisition of HTI 125,000 125 312,375 312,500
For services rendered 9,997 3 10,000
Exercise of stock options 9,000 9 29,241 29,250
Net loss (784,547) (784,547)
--------- ------ ---------- ---------- ----- ----------
Balance - December 31, 1993 5,301,808 5,302 2,470,570 1,468,732 (16) 3,944,588
Net Income 413,737 413,737
--------- ------ ---------- ---------- ----- ----------
Balance - December 31, 1994 5,301,808 5,302 2,470,570 1,882,469 (16) 4,358,325
Net income 517,714 517,714
--------- ------ ---------- ---------- ----- ----------
Balance - December 31, 1995 5,301,808 $5,302 $2,470,570 $2,400,183 $(16) $4,876,039
========= ====== ========== ========== ===== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE>
DRCA MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 517,714 $ 413,737 $ (784,547)
Noncash adjustments:
Depreciation and amortization 1,094,386 1,121,292 1,157,873
Minority interest (33,654) (4,604) (71,919)
Deferred income taxes 347,754 33,000 (155,047)
Other (36,634) 58,715
Change in assets and liabilities, excluding acquisitions:
Accounts receivable, net (1,751,830) (1,470,694) (998,118)
Other current assets (27,696) (40,447) 141,776
Other assets (3,018) 9,836 40,492
Accounts payable 97,618 134,109 484,626
Accrued expenses 339,588 108,152 64,267
Income taxes receivable/payable (393,443) 326,202 (276,753)
----------- ----------- ----------
Net cash provided (used) by operating activities 187,419 593,949 (338,635)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (132,643) (50,682) (189,855)
Business acquisitions (459,708)
Net proceeds from assets held for sale 237,388
Issuance of notes receivable (600,000)
Collections on notes receivable 403,031 8,240 127,046
----------- ----------- ----------
Net cash provided (used) by investing activities (329,612) 194,946 (522,517)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings 2,066,033 951,340
Payments on bank borrowings (1,780,461) (32,348)
Payments on other notes, net (408,337) (458,177) (175,108)
Payments on capital lease obligations (422,041) (384,584) (309,112)
Minority interest distributions (17,712) (36,500) (24,998)
Proceeds from sale of common stock and option exercises 760,301
----------- ----------- ----------
Net cash provided (used) by financing activities (562,518) (879,261) 1,170,075
----------- ----------- ----------
NET CHANGE IN CASH AND EQUIVALENTS (704,711) (90,366) 308,923
CASH AND EQUIVALENTS:
BEGINNING OF YEAR 813,942 904,308 595,385
----------- ----------- ----------
END OF YEAR $ 109,231 $ 813,942 $ 904,308
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 330,749 $ 306,311 $ 232,764
Income taxes paid (recovered) 405,000 (204,058)
Property and equipment acquired with debt 1,593,775
Notes issued and assumed in acquisition 220,576
Common stock issued in acquisition 312,500
Equipment acquired under capital leases 24,065 180,415 13,410
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------
DRCA Medical Corporation ("DRCA" or the "Company") is a physician practice
management company specializing in orthopedic and related services, including
the managed occupational health care program developed by the Company. Under
this integrated approach, the affiliated medical groups provide a continuum of
diagnostic, therapeutic and restorative rehabilitation services principally to
clients and patients in the orthopedic and occupational medicine, workers'
compensation and personal injury segments in selected geographic markets. The
Company currently operates principally in the Houston, Texas and Little Rock and
North Little Rock, Arkansas areas.
The following is a summary of the Company's significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and limited partnerships in which the Company holds
majority control through its general and limited partner interests. The equity
of limited partner investors in consolidated partnerships is reported as
minority interest. The consolidated financial statements also include the
results of operations of the affiliated medical groups which the Company
effectively controls through contractual relationships. The Company believes
that it exercises perpetual and unilateral control over such entities as a
result of (i) the long term, noncancellable nature of the related management
services agreements, (ii) the nominal capital of the affiliated medical groups,
(iii) economic interdependency of operations and (iv) the Company's right to
designate the physician owners, and successors thereto, of the affiliated
medical groups. All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates in the Consolidated Financial Statements
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the disclosures of contingent assets and
liabilities. Because of the inherent uncertainties in this process, actual
future results could differ from those expected at the reporting date.
Revenue Recognition
Revenue is recognized at the net amounts expected to be received as the related
patient care, management or related services are rendered. A substantial
portion of the Company's revenues are billed to insurance companies and other
third-party payors, and as such are subject to retrospective review and possible
reduction. Such adjustments, if any, are charged or credited to income when
they become known. Revenues related to services provided to personal injury
claimants is subject to reduction based on the outcome of the related legal
actions. A provision is made for revenues estimated to be uncollectible.
Cash and Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, including assets under capital leases, is provided over
estimated useful lives ranging from 5 to 7 years using the straight-line method.
27
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenditures for additions, renewals, and betterments are capitalized and
expenditures for repairs and maintenance are charged to expense as incurred.
Intangible Assets
Intangible assets arising from historical acquisitions, consisting principally
of noncompete agreements, patient medical records and goodwill, are being
amortized on a straight-line basis over 4 and 5, 8 and 15, and 20 years,
respectively. Effective January 1, 1995, the Company adopted a new standard
which prescribes the accounting for impairment of long-lived assets. Adoption
of this standard had no impact on results of operations or financial position
since the Company's previous impairment policy conformed substantially to the
new standard. Under the new standard, the Company reviews the carrying value of
intangible assets for impairment at each balance sheet date or when events or
changes in circumstances indicate their recorded amounts may not be recoverable.
If the review indicates that the undiscounted cash flows from operations of the
acquired entity or management services agreement over the remaining amortization
period is less than the recorded amount of the related intangible asset, the
carrying value will be reduced to fair value as estimated using accepted
valuation techniques, including discounted cash flow analyses, in the absence of
an active market for the asset.
Income Taxes
Deferred income taxes are provided using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company's assets and liabilities. Deferred income taxes are measured using the
rates expected to be in effect when the temporary differences are expected to be
included in the Company's consolidated tax return. In estimating future tax
consequences, all expected future events are considered other than enactments of
changes in the tax laws or rates.
Earnings (loss) per share
Computations of earnings or loss per common share are based upon the weighted-
average number of shares of common stock outstanding during the periods and the
dilutive effect of common stock equivalents of outstanding options and warrants
to purchase common stock. Fully diluted per share amounts have not been
presented since they do not differ significantly from the primary presentation.
Fair values of financial instruments
Due, generally, to their short term nature and reasonable interest rates and
terms, the carrying value of the Company's assets and liabilities is believed to
approximate their fair values unless otherwise indicated.
Reclassifications
Certain amounts in the 1994 and 1993 consolidated statements of operations have
been reclassified to conform to the 1995 presentation, the most significant of
which is an allocation of a portion of the provision for doubtful accounts to
contractual allowances to more properly reflect revenue from services rendered
to personal injury claimants at the net amounts expected to be collected upon
claim adjudication. The reclassification was based on improved historical
information and currently expected recovery rates. In addition, selected
natural expense classifications have been presented to enhance industry
comparability. None of these changes affected net income or loss.
28
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - REVENUE AND ACCOUNTS RECEIVABLE CONCENTRATIONS:
- -------------------------------------------------------
At December 31, 1995, the Company provides substantially all of its services
through affiliated medical groups in Texas and Arkansas which have a total of
ten full-time and two part-time physicians. The loss of the services of any of
the physicians could have a material effect on the Company's revenues. In 1995,
the medical services provided to the medical group's patients by William F.
Donovan, M.D., a Company shareholder and director, was 16% of the Company's
revenues.
In the years ended December 31, 1995, 1994 and 1993, the Company's payor mix as
a percentage of net revenues was as follows: state workers' compensation
programs - 47%, 49% and 52%; direct billings to industrial clients -22%, 23% and
25%; personal injury claims subject to legal action - 16%, 12% and 7%; indemnity
insurance; and other - 15%, 16% and 16%.
Included in net accounts receivable at December 31, 1995 and 1994 are amounts
due from patients pursuing personal injury cases of approximately $2,396,032 and
$1,489,000, respectively. Due to the nature of the judicial process, these
receivables frequently have a collection cycle which could approach two or more
years. The Company provides contractual allowances on personal injury claimant
revenues based on historical collection experience and related factors. While
the Company believes that the allowances provided are adequate, changes in the
court and public attitudes toward such claims, levels of judicial backlogs of
such claims, the quality and validity of related legal actions and other factors
can affect the ultimate amounts which will be collected. Texas continues to
experience claims backlogs in the courts; however, payment experience currently
indicates that recoverability rates do not vary significantly based on the age
of the claim. Changes in factors affecting collectibility are reflected as
revenue adjustments in the period they become known.
Accounts receivable are net of an allowance for doubtful accounts of $180,070
at December 31, 1995 and $123,283 at December 31, 1994. Substantially all the
Company's revenues are billed to third-party payors, principally insurance
companies, self-insured employers and industry insurers, and the related
receivables are generally not collateralized. Due to the numerous payors with
which the Company operates, the more significant of which are large established
entities, as well as the ongoing review conducted by the Company of the adequacy
of its allowances for doubtful accounts and contractual adjustments, additional
credit risk in accounts receivable is not believed to be significant.
NOTE 3 - INTANGIBLE ASSETS:
- --------------------------
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
Useful Lives 1995 1994
---------- ----------
<S> <C> <C> <C>
Noncompete agreements 4 - 5 $ 625,000 $ 625,000
Patient medical records 8 - 15 774,661 774,661
Goodwill 20 372,368 372,368
---------- ----------
1,772,029 1,772,029
Accumulated amortization (867,868) (633,772)
---------- ----------
$ 904,161 $1,138,257
========== ==========
</TABLE>
29
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE:
- ----------------------
On February 6, 1995, the Company executed and funded two bank credit facilities
and paid off two matured facilities which were in place on December 31, 1994.
The two new facilities included a $750,000 term loan payable in 48 monthly
installments of $19,061 and a $1,000,000 revolving line of credit. The
facilities were secured by substantially all assets of the Company, its
subsidiaries and the affiliated medical groups and guarantees by certain
affiliates.
On January 30, 1996, the Company amended and extended its bank credit
facilities and increased its revolving line of credit from $1,000,000 to
$2,000,000. The credit facilities are secured by substantially all assets of
the Company, its subsidiaries and affiliated medical groups. The revolving line
of credit requires the payment of a 1% annual fee. Borrowings under the line
bear interest at prime + 1.25% and the line expires January 30, 1997. Advances
under the line of credit are subject to a borrowing base formula under which the
Company presently has sufficient collateral to support the entire line
availability. The line of credit as well as other borrowings from the lender are
subject to the terms of a loan agreement which include financial ratio covenants
and various other provisions. The term loan is payable monthly at $19,061 with
interest at prime +1.5% and it matures in January, 1999. The Company also
received a commitment to fund up to $500,000 in equipment purchases. Amounts
advanced against this commitment will convert to term notes with 3- and 4- year
maturities as of January 30, 1997.
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Bank credit facilities (as of January 1996):
Revolving line of credit, 9.75% in 1995, expires January 1997 858,953
Term note, 10% in 1995, payable monthly, due January 1999 604,248
Prime plus 1% (8.5% at December 31, 1994) bank revolving
line of credit and 7% term note, paid in February 1995 1,292,086
7.75% note, secured by MRI equipment, payable in installments
through September 1998 727,544 961,371
10% acquisition notes, monthly payments of $8,000 principal
and interest, remaining paid in January 1996 127,354 231,034
8 1/2% acquisition note, $5,221 payable monthly
through January 3, 1997 64,629 119,246
Equipment notes at various rates 120,386 22,141
----------- -----------
2,503,114 2,625,878
Less current portion (1,597,224) (717,229)
----------- -----------
$ 905,890 $ 1,908,649
=========== ===========
</TABLE>
Maturities of indebtedness are $1,597,224 in 1996, $455,836 in 1997, $408,306
in 1998 and $41,748 in 1999.
30
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES:
- ---------------------
The provisions (benefit) for income taxes for the years ended December 31 are
comprised of:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Federal:
Current $ 2,862 $151,075 $(337,477)
Deferred 337,138 33,000 (66,775)
State 35,423 51,126 --
-------- -------- ---------
$375,423 $235,201 $(404,252)
======== ======== =========
</TABLE>
The difference between the effective income tax rate and the amount which would
be determined by applying the statutory U.S. income tax rate to income before
income taxes for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) for income taxes
at U.S. statutory rates 303,667 $ 220,639 $(404,139)
State income taxes 35,423 51,126
Refund on amended returns (42,277)
Nondeductible expenses and other 36,333 5,713 (113)
--------- --------- ----------
$ 375,423 $ 235,201 $(404,252)
========= ========= ==========
</TABLE>
Deferred income taxes at December 31 are comprised of:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 21,179
Allowance for doubtful accounts 30,676 $ 152,000
Operating loss carryforward 93,295
Alternative minimum tax credit 19,000
Other 6,335
--------- ---------
151,485 171,000
--------- ---------
Deferred tax liabilities:
Accrued expenses (32,602) (11,000)
Amortization of intangible assets (83,869) (73,000)
Depreciation (72,718) (104,000)
Cash basis for certain revenues for tax reporting (327,050)
--------- ---------
(516,239) (188,000)
--------- ---------
Net deferred liability $(364,754) $ (17,000)
========= =========
</TABLE>
31
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASES:
- ---------------
The Company leases office space, clinic facilities and certain equipment under
noncancelable operating and capital leases expiring through the year 2000. Rent
expense for all noncancellable operating leases amounted to $1,128,783 in 1995,
$1,081,542 in 1994 and $1,036,077 in 1993.
Future minimum payments by year and in the aggregate related to capital and
noncancelable operating leases at December 31, 1995 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
1996 157,773 994,218
1997 59,790 723,265
1998 48,776 379,138
1999 28,615 163,098
2000 52,474
--------- ----------
Total minimum lease payments 294,954 $2,312,193
==========
Amounts representing interest (38,347)
---------
Present value of net minimum lease
payments 256,607
Less current portion (139,103)
---------
Long-term obligation $ 117,504
=========
</TABLE>
Included in equipment are assets acquired under capital leases of $1,850,867 at
December 31, 1995 and $1,826,802 at December 31, 1994. Accumulated amortization
of assets under capital leases amounted to $1,349,349 at December 31, 1995 and
$1,101,687 at December 31, 1994. Contingent rentals based on utilization of the
certain MRI equipment amounted to $42,201 in 1995, $55,456 in 1994 and $57,587
in 1993. The contingent rental obligation expires in March, 1996.
NOTE 7 - STOCK OPTIONS AND WARRANTS:
- -----------------------------------
The Company has a Stock Option Plan which provides for the granting of options
at not less than market value to purchase up to 1,000,000 shares of common stock
by eligible employees of the Company. Option prices and other terms are
determined by the Board of Directors. Transactions for the years ended December
31, 1995, 1994 and 1993 for employee stock options granted under the plan are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Outstanding at January 1 240,000 319,000 327,000
Granted 141,750 24,500 99,500
Exercised (9,000)
Canceled, expired and forfeited (40,000) (103,500) (98,500)
------- -------- -------
Outstanding at December 31 341,750 240,000 319,000
======= ======== =======
Available for grant at December 31 612,750 714,500 635,500
======= ======== =======
Exercisable at December 31 321,582 170,667 229,000
======= ======== =======
</TABLE>
32
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Price range of options:
Granted $2.50 - $4.25 $3.00 - $3 1/4 $3 9/16 - $4 9/16
Exercised 3 1/4
End of year 2.50 - 5 1/8 3.00 - 5 1/8 3 1/4 - 5 1/8
</TABLE>
During 1995, the exercise price for a total of 142,500 options to purchase
common stock granted under the plan was reduced from $4.525 to $3.50 per share,
the market price at the repricing date.
In February 1989, the Company issued warrants to purchase 100,000 shares of
common stock each to Jose E. Kauachi, the Company's Chairman of the Board of
Directors, President and CEO (Mr. Kauachi) and Mr. William F. Donovan, M. D.,
Director of the Company and Medical Director of the Company's affiliated
medical groups (Dr. Donovan). These warrants were issued as compensation for
services rendered and for the officers' personal guarantee of corporate debt and
other obligations. The warrant exercise price was $1.75 per share and were
originally exercisable through February 22, 1994. By amendments effective in
February 1994 anad 1995, the expiration dates of the warrants have been extended
to February 22, 1999 and the exercise price has been adjusted to the then market
value of $2.125 per share.
The Company has periodically issued options or warrants to purchase common
stock as compensation for services and other compensation outside of its option
plan. The Company has outstanding warrants to purchase 1,500 shares of common
stock at $5.125 per share which expire in April 1997 and warrants to purchase
30,000 shares at $2.125 per share which expire in July 1999. The Company has
36,000 options outstanding at $4.125 per share which expire in August 1998 and
6,250 options outstanding at $3.75 per share which expire November 1997 through
April 1998.
NOTE 8 - ACQUISITIONS AND DISPOSITIONS:
- --------------------------------------
On January 22, 1993, the Company acquired certain assets of Health Testing,
Inc. ("HTI") and Sullivan Mobile X-Ray Screening Services, Inc. ("Sullivan"),
both Texas corporations, for a total consideration of $793,887 consisting of
$181,387 in cash, 125,000 shares of common stock valued at $312,500, promissory
notes of $200,000 and acquisition costs of $100,000. HTI and Sullivan offer a
wide array of medical services through three industrial medicine clinics in
Houston, Texas and six mobile health testing units.
On July 2, 1993, the Company acquired certain assets of Northwest MediCenter
Associates, P.A. ("Northwest"), a Texas professional association, Flex-Rite,
Inc. ("Flex-Rite"), a Texas corporation, and Tarman, Ltd. ("Tarman"), a Texas
limited partnership, for a total consideration of $278,321 cash. Northwest,
Flex-Rite and Tarman offered a wide array of medical services through a clinic
in Houston, Texas.
The acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of operations of the acquired companies are
included with those of the Company since their respective acquisition dates.
33
<PAGE>
DRCA MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONTINGENCIES:
- ----------------------
The Company maintains professional liability insurance in levels it believes to
be adequate in the circumstances. In the ordinary course of its business, the
Company is subject, from time to time, to claims and legal actions, including as
a named party to professional liability claims involving medical groups and
physicians affiliated with the Company. As of March 30, 1996, management is not
aware of any material actual or unasserted claims or actions pending against the
Company.
NOTE 10 - RELATED PARTY TRANSACTIONS:
- ------------------------------------
The Company, either directly or through an affiliated medical group, paid
Northshore Orthopedics (NSO), a professional corporation owned by Dr. Donovan,
$504,878 in 1995 and $59,234 in 1994 for medical director's fees and for
contract labor, equipment, and contracted services. Dr. Donovan began
practicing medicine full time with the Company's Houston affiliated medical
group during 1995 and, pursuant to such affiliation, the Company loaned NSO
$500,000 for operating expenses. The loan is collateralized by NSO's accounts
receivable (approximately $1.3 million at the time the loan was made) and is
payable as the receivables are collected. Interest at 9.5% for a total of
$13,792 was earned by the Company on the note in 1995 and the balance on the
note at December 31, 1995 was $135,802. The Company retains a fee for
collecting NSO's receivables and the total of such fees aggregated $242,480 in
1995.
The Company leases several office suites used for clinic and administrative
functions from Pacati, Inc, a company which is jointly owned by Mr. Kauachi and
Dr. Donovan. Monthly payments, included in operating lease commitments in Note
7, currently total $15,945 which includes amortization of leasehold
improvements. Leases are generally for five year terms and expire at various
dates from 1997 through 1999. The Company paid Pacati, Inc. $210,099 in 1995,
$174,763 in 1994 and $124,417 in 1993 under the rental arrangements. In August
1993, Pacati, Inc. allowed the Company to defer approximately six months of
lease payments until 1994 in return for a note receivable from the Company which
earned interest at a 6% annual rate. The note was repaid prior to December 31,
1994 and total payments under the note were $26,959.
Dr. Donovan purchased a medical clinic from the Company in March 1994 for
$240,000. The original cost to the Company was $190,000 and the gain on the
transaction was $36,634.
34
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Filed As
- ------------- --------------------------------------------- ---------------
<S> <C> <C>
3.1 Articles of Incorporation of the Company, as
amended to date. /1/Exhibit 3.1
3.2 Bylaws of the Company, as amended to date. /12/Exhibit 3.2
3.3 Articles of Merger of DRCA and Doctors
Rehabilitation Corporation of America filed
June 29, 1990. /2/Exhibit 3.3
3.4 Articles of Merger of DRCA and Doctors
Rehabilitation Corporation of America filed
July 16, 1990. /1/Exhibit 3.2
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Filed As
- ------------- --------------------------------------------- ---------------
<S> <C> <C>
3.5 Plan and Agreement of Merger between DRCA and
Doctors Rehabilitation Corporation
of America dated May 10, 1990. /1/Exhibit 3.3
4.1 Specimen of Common Stock Certificate, $.001
par value, of the Company. /1/Exhibit 4.1
4.2 Warrant Agreement between the Company and
Jose E. Kauachi dated February 23, 1989. /3/Exhibit 4.3*
4.3 Warrant Agreement extension between the Company
and Jose E. Kauachi dated February 22, 1994. /11/Exhibit 4.3*
4.4 Warrant Agreement Amendment between the Company
and Jose E. Kauachi dated November 21, 1994 and
effective February 22, 1994 /12/Exhibit 4.4*
4.5 Warrant Agreement between the Company and
William F. Donovan, M.D. dated February 23, 1989. /3/Exhibit 4.5*
4.6 Warrant Agreement extension between the Company
and William F. Donovan, M.D. dated February 22, 1994. /11/Exhibit 4.5*
4.7 Warrant Agreement Amendment between the Company
and William F. Donovan, M.D. dated November 21, 1994
and effective February 22, 1994. /12/Exhibit 4.7*
4.8 Warrant Certificate dated effective July 25, 1989
issued to Raymond Bishop by Doctors Rehabilitation
Corporation of America. /2/Exhibit 4.5
4.9 Warrant Agreement extension between the Company
and Ray Bishop dated July 31, 1993. /11/Exhibit 4.7
4.10 Warrant Agreement between the Company and
Victor M. Rivera, M.D. dated April 26, 1992. /9/Exhibit 4.8
4.11 Second Warrant Agreement Amendment dated February 2,
1995 between the Company and Jose E. Kauachi /12/Exhibit 4.11*
4.12 Second Warrant Agreement Amendment dated February 2,
1995 between the Company and William F. Donovan, M.D. /12/Exhibit 4.12*
10.1 Physical Therapy Agreement dated July 1, 1993 between
Sun Belt Regional Medical Center and the Company
with extension letter. /11/Exhibit 10.4
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Filed As
- ------------- --------------------------------------------- ---------------
<S> <C> <C>
10.2 Physical Therapy Agreement dated July 1, 1993 between
Sun Belt Regional Medical Center and the Company
with extension letter. /11/Exhibit 10.5
10.3 Physical Therapy Agreement dated July 1, 1993 between
Sun Belt Regional Medical Center and the Company
with extension letter. /11/Exhibit 10.6
10.4 Guaranty Agreement dated effective January 3, 1992
by the Company for the benefit of Medi-Stat, Inc. /2/Exhibit 10.39
10.5 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America. /4/Exhibit 10.1*
10.6 Amendment of 1988 Stock Option Plan /10/Exhibit 10.2*
10.7 Stock Option Agreement dated September 1, 1992 between
Ray Bishop and the Company /9/Exhibit 10.35
10.8 Noncompetition agreement dated effective January 22,
1993 between DRCA Houston Clinics, Inc. and Johnny L.
Sanders. /9/Exhibit 10.39*
10.9 Loan and Security Agreement between the Company
and MetLife Capital Corporation dated October 8, 1992 /9/Exhibit 10.48
10.10 Amendment No. One (1) dated October 28, 1993, to the
loan between MetLife Capital Corporation and DRCA
Medical Corporation /11/Exhibit 10.49
10.11 Equipment lease agreement dated effective October 20, 1992
between the Company and DRCA Little Rock Clinics, Inc. /9/Exhibit 10.51
10.12 Management Agreement between DRCA Houston Clinics, Inc
and Occupational Medicine Associates of Houston, P.A.
Dated effective August 1, 1993 /11/Exhibit 10.53*
10.13 Administrative Services Agreement between DRCA Houston
Clinics, Inc. and the Company dated effective
August 1, 1993. /11/Exhibit 10.57
10.14 Option Agreement among Occupational Medicine Associates
of Houston, P.A., William F. Donovan, M.D., and DRCA
Houston Clinics, Inc. dated effective August 1, 1993. /11/Exhibit 10.58*
10.15 Management Agreement between DRCA Little Rock
Clinics, Inc. and Occupational Medicine Associates
of Little Rock, P.A. dated effective September 1, 1993. /11/Exhibit 10.59*
10.16 Administrative Services Agreement between DRCA Little
Rock Clinics, Inc. and the Company dated effective
September 1, 1993. /11/Exhibit 10.63
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Filed As
- ------------- --------------------------------------------- ---------------
<S> <C> <C>
10.17 Option Agreement among Occupational Medicine Associates
of Little Rock, P.A., William F. Donovan, M.D.,
and DRCA Little Rock Clinics, Inc. dated effective
September 1, 1993. /11/Exhibit 10.64*
10.18 Facilities lease agreement between Pacati, Inc. and
DRCA Medical Corporation dated December 23, 1992, for
6200 Gulf Freeway, Suite 212, Houston, Texas. /9/Exhibit 10.50
10.19 Facilities lease agreement between Pacati, Inc. and
DRCA Medical Corporation dated May 20, 1993, for
6200 Gulf Freeway, Suite 104, Houston, Texas. /11/Exhibit 10.72
10.20 Facilities lease agreement between Pacati, Inc. and
DRCA Medical Corporation dated May 20, 1993, for
6200 Gulf Freeway, Suite 206, Houston, Texas. /11/Exhibit 10.73
10.21 Facilities lease agreement between Pacati, Inc. and
DRCA Medical Corporation dated May 20, 1993, for
6200 Gulf Freeway, Suite 108, Houston, Texas. /11/Exhibit 10.74
10.22 Loan Agreement dated January 30, 1995 between the Company,
its subsidiaries, affiliates and guarantors and First
Interstate Bank of Texas, N.A. /12/Exhibit 10.78
10.23 Promissory Note for $750,000 dated January 30, 1995
between the Company and First Interstate
Bank of Texas, N.A. /12/Exhibit 10.79
10.24 Promissory Note for $1,000,000 dated January 30, 1995
between the Company and First Interstate
Bank of Texas, N.A. /12/Exhibit 10.80
10.25 Commercial Guaranty dated January 30, 1995 between Jose E.
Kauachi and First Interstate Bank of Texas, N.A. /12/Exhibit 10.81
10.26 Commercial Guaranty dated January 30, 1995 between
William F. Donovan, M.D. and First Interstate Bank
of Texas, N.A. /12/Exhibit 10.82
10.27 Commercial Guaranty dated January 30, 1995 between
Sharon A. Donovan and First Interstate Bank of
Texas, N.A. /12/Exhibit 10.83
10.28 Incentive Stock Option Agreement between the Company and
William F. Donovan, M.D. dated February 2, 1995 /12/Exhibit 10.85*
10.29 Executive Employment Agreement between the Company and
Jose E. Kauachi dated November 15, 1994 /12/Exhibit 10.90*
10.30 Executive Employment Agreement between the Company and
Jefferson R. Casey dated January 22, 1995 /12/Exhibit 10.91*
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Filed As
- ------------- --------------------------------------------- ---------------
<S> <C> <C>
10.31 Executive Employment Agreement between the Company
and Johnny L. Sanders dated January 22, 1995 /12/Exhibit 10.93*
10.32 Amendment dated July 1, 1994 to the facilities lease
between Pacati, Inc. and DRCA Medical Corporation
dated November 15, 1992 for 6200 Gulf Freeway, Suite
200, Houston, Texas. /12/Exhibit 10.95
10.33 Amendment and Assignment dated April 4, 1994 to the
facilities lease between Pacati, Inc. and Dr, William
F. Donovan - Medical Consultants assigned to DRCA Houston
Clinics, Inc. dated October 31, 1992. /12/Exhibit 10.96
10.34 Management Services Agreement by and between
DRCA Houston Clinics, Inc. and PhysiCare, L.L.P.
dated effective March 1, 1995 /13/Exhibit 10.99
10.35 Equipment Lease Agreement by and between Northshore
Orthopedics Assoc. and DRCA Houston Clinics, Inc.
dated effective March 1, 1995 /13/Exhibit 10.100
10.36 Lease Agreement by and between William F.
Donovan, M.D. and DRCA Houston Clinics, Inc.
dated effective March 1, 1995 /13/Exhibit 10.101
10.37 Collection Services Agreement by and between
DRCA Houston Clinics, Inc. and Northshore Orthopedics
Assoc. dated effective March 1, 1995 /13/Exhibit 10.102
10.38 Promissory Note for $500,000 by Northshore
Orthopedics Assoc. and William F. Donovan, M.D.
as Co-Makers and DRCA Houston Clinics, Inc.
dated effective March 1, 1995 /13/Exhibit 10.103
10.39 Security Agreement between Northshore Orthopedics
Assoc. and DRCA Houston Clinics, Inc. dated
effective March 1, 1995 /13/Exhibit 10.104
10.40 Promissory Note for $1,000,000 by PhysiCare,
L.L.P. and DRCA Houston Clinics, Inc. dated
effective March 1, 1995 /13/Exhibit 10.105
10.41 Security Agreement between PhysiCare, L.L.P.
and DRCA Houston Clinics, Inc. dated effective
March 1, 1995 /13/Exhibit 10.106
10.42 Master Transaction Agreement by and among
the Company, DRCA Houston Clinics, Inc.,
Occupational Medicine Associates of
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Filed As
- ------------- --------------------------------------------- ---------------
<S> <C> <C>
Houston, P.A., Northshore Orthopedics Assoc.,
PhysiCare, L.L.P. and William F. Donovan, M.D.
dated effective March 1, 1995 /13/Exhibit 10.107
10.43 Professional Services Agreement Medical
Director between William F. Donovan, M.D.
and the Company dated effective
March 1, 1995 /13/Exhibit 10.108
10.44 Promissory Note for $600,000 by the Company
to First Interstate Bank of Texas, N.A.
dated May 15, 1995 /13/Exhibit 10.109
10.45 Amendment to Loan Agreement dated January 30, 1995
by and among the Company, Northshore Orthopedics
Assoc., PhysiCare, L.L.P., and First Interstate
Bank of Texas, N.A. dated effective May 15, 1995 /13/Exhibit 10.110
10.46 Commercial Guarantee by PhysiCare, L.L.P. to
First Interstate Bank of Texas, N.A.
dated May 15, 1995 /13/Exhibit 10.111
11 Calculations for Primary and Fully Diluted earnings
per share /14/Same
21 Subsidiaries of the Company. /14/Same
23 Consent of Independent Accountant to incorporation
by reference of 1995 financial statements contained
in this Report on Form 10-KSB into the Company's
Registration Statement on Form S-8, Registration
No. 33-42624, filed with the Securities and Exchange
Commission on September 6, 1991 /14/Same
</TABLE>
- ---------------
/1/Incorporated by reference to the Company's Annual Report on 10-K dated March
28, 1991 (under the exhibit number indicated in the column titled "Filed As").
/2/Incorporated by reference to the Company's Annual Report on 10-K dated March
26, 1992, (under the exhibit number indicated in the column titled "Filed As").
/3/Incorporated by reference to Post-Effective Amendment No. 1 to the Doctors
Rehabilitation Corporation of America Registration Statement on Form S-1,
Registration No. 33-31691 (under the exhibit number indicated in the column
titled "Filed As").
/4/Incorporated by reference to the Doctors Rehabilitation Corporation of
America Registration Statement on Form 10, Registration No. 0-17006 (under the
exhibit number indicated in the column titled "Filed As").
/5/Incorporated by reference to the Company's Current Report on Form 8-K dated
November 1, 1990 (under the exhibit number indicated in the column titled "Filed
As").
40
<PAGE>
/6/Incorporated by reference to the Company's Form 8 dated December 31, 1990,
amending the Company's Current Report on Form 8-K dated November 1, 1990 (under
the exhibit number indicated in the column titled "Filed As").
/7/Incorporated by reference to the Company's Current Report on Form 8-K dated
January 17, 1992 (under the exhibit number indicated in the column titled "Filed
As").
/8/Incorporated by reference to the Company's Current Report on Form 8-K dated
February 4, 1993 (under the exhibit number indicated in the column titled "Filed
As").
/9/Incorporated by reference to the Company's Annual Report on Form 10-KSB
dated March 30, 1993, (under the exhibit number indicated in the column titled
"Filed As").
/10/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/93 dated November 12, 1993 (under the exhibit number
indicated in the column titled "Filed As").
/11/Incorporated by reference to the Company's Annual Report on Form 10-KSB
dated March 30, 1994 (under the exhibit number indicated in the column titled
"Filed As").
/12/Incorporated by reference to the Company's Annual Report on Form 10-KSB
dated March 30, 1995 (under the exhibit number indicated in the column titled
"Filed As".
/13/Incorporated by reference to the company's Quarterly Report on Form 10-QSB
for the quarter ended 6/30/95 dated August 11, 1995 (under the exhibit number
indicated in the column titled "Filed As".
/14/Filed herewith
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Securities and Exchange
Commission during the last quarter of the fiscal year ended December 31, 1995.
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DRCA MEDICAL CORPORATION
By: /s/ Jose E. Kauachi
___________________________________
JOSE E. KAUACHI
Chairman of the Board,
President & Chief Executive Officer
Dated: March 30, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ Jose E. Kuachi
- ------------------------------- Chairman of the Board, President March 30, 1996
JOSE E. KAUACHI and Chief Executive Officer
By: /s/ Jefferson R. Casey
- ------------------------------- Senior Vice President, Treasurer March 30, 1996
JEFFERSON R. CASEY (Principal Financial & Accounting
Officer), and Secretary
By: /s/ Victor M. Rivera, M.D.
- -------------------------------- Director March 30, 1996
VICTOR M. RIVERA, M.D.
By: /s/ Juan R. Dickey, M.D.
- -------------------------------- Director March 30, 1996
JUAN R. DICKEY, M.D.
By: /s/ William F. Donovan, M.D.
- -------------------------------- Director March 30, 1996
WILLIAM F. DONOVAN, M.D.
</TABLE>
42
<PAGE>
EXHIBIT 11
DRCA MEDICAL CORPORATION
SCHEDULE RE: EARNINGS (LOSS) PER SHARE
For the three years ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Primary
Average shares outstanding 5,285,975 5,269,975 5,066,311
Net effect of dilutive stock
options and warrants,
based on the treasury
stock method using average
market price 150,583 8,715 --
---------- ---------- ----------
5,436,558 5,278,690 5,066,311
========== ========== ==========
Net income (loss) $ 517,714 $ 413,737 $ (784,547)
========== ========== ==========
Earnings (loss) per share $ .10 $ .08 $ (.15)
========== ========== ==========
Fully diluted
Average shares outstanding 5,285,975 5,269,975 5,066,311
Net effect of dilutive stock
options and warrants, based
on the treasury stock
method using the year-end
market price, if higher
than average market price 150,583 8,715 --
---------- ---------- ----------
5,436,558 5,278,690 5,066,311
========== ========== ==========
Net income (loss) $ 517,714 $ 413,737 $ (784,547)
========== ========== ==========
Earnings (loss) per share $ .10 $ .08 $ (.15)
========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
TEXAS LIMITED PARTNERSHIPS:
Doctors' Medical Therapy Centers - Orange, Ltd.
Doctors' Medical Therapy Centers - Hemet, Ltd.
Doctors' Medical Therapy Centers - Houston II, Ltd.
Atlanta Work Hardening Dynamics - I, Ltd.
Trade Names: Work Hardening Dynamics
Work Dynamics
Spectrum Imaging Centers - Houston I, Ltd.
Trade Names: Spectrum Imaging
TEXAS CORPORATIONS:
DRCA Houston Clinics, Inc.
Trade Names: Medi-Stat Medical Clinics
Medi-Stat Mobile Health Testing
ARKANSAS CORPORATION:
DRCA Little Rock Clinics, Inc.
Trade Names: Medi-Stat Medical Clinics
Spectrum Little Rock Imaging
PhysiCare Little Rock, Inc.
Trade Names: Medi-Stat Medical Clinics
Spectrum Little Rock Imaging
CALIFORNIA CORPORATIONS:
Rehabilitation Corporation of America
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-42624) of DRCA Medical Corporation of our report
dated March 26, 1996 appearing on page 22 of this Form 10-KSB.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, Texas
March 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-KSB FOR
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 109,231
<SECURITIES> 0
<RECEIVABLES> 5,732,228
<ALLOWANCES> 180,070
<INVENTORY> 0
<CURRENT-ASSETS> 6,449,762
<PP&E> 6,446,648
<DEPRECIATION> 3,999,252
<TOTAL-ASSETS> 9,850,939
<CURRENT-LIABILITIES> 3,794,920
<BONDS> 1,023,394
0
0
<COMMON> 5,302
<OTHER-SE> 4,870,737
<TOTAL-LIABILITY-AND-EQUITY> 9,850,939
<SALES> 15,539,355
<TOTAL-REVENUES> 15,539,355
<CGS> 10,215,110
<TOTAL-COSTS> 14,378,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 893,316
<INTEREST-EXPENSE> 301,532
<INCOME-PRETAX> 893,137
<INCOME-TAX> 375,423
<INCOME-CONTINUING> 517,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517,714
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
