SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Period Ended June 30, 1997
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number 1-10966
HEALTH PROFESSIONALS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3076108
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 East Oakland Park Boulevard, Suite 300, Fort Lauderdale, Fl 33306
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(Address of principal executive offices)
954-766-2552
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X , No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
- ----------------------------- ----------------------------
Common Stock, $.02 par value 5,485,000
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HEALTH PROFESSIONALS, INC.
AND SUBSIDIARIES
I N D E X
---------
Page No.
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PART I - Financial Information
Condensed Consolidated Balance Sheets
March 31, 1997 and September 30, 1996 3 - 4
Condensed Consolidated Statements of Operations
Three and Six Months Ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows,
Six Months Ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7 - 8
Management' Discussion and Analysis of Financial
Condition and Results of Operations 9 - 14
PART II - Other Information 15
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HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 September 30
Assets 1997 1996
- ------ ---- ----
Current assets:
Cash $ 32,000 $ 49,000
Accounts receivable, net 4,280,000 3,425,000
Inventory 87,000 108,000
Prepaid consulting fees,
Current portion 182,000 115,000
Prepaid expenses and other 53,000 46,000
------------ -------------
Total current assets 4,634,000 3,743,000
Equipment, furniture & Fixtures
And leasehold improvements, net 913,000 1,338,000
Prepaid consulting fees, less
Current portion 129,000 145,000
Covenants not to compete, net 230,000 419,000
Costs in excess of net assets
Of businesses acquired, net 6,078,000 6,134,000
Other assets 458,000 463,000
------------ -------------
Total $ 12,442,000 $ 12,242,000
============ =============
See notes to condensed consolidated financial statements.
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<PAGE>
HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 September 30
Liabilities and Stockholders' 1997 1996
- ------------------------------ ---- ----
Equity
- ------
Current liabilities:
Accounts payable and accrued
Expenses $ 3,965,000 $ 3,725,000
Accrued salaries and payroll taxes 200,000 117,000
Factoring line of credit 1,215,000 1,100,000
Current portion of long term debt 336,000 474,000
------------ -------------
Total current liabilities 5,716,000 5,416,000
------------ -------------
Long term debt, less current portion 2,067,000 1,519,000
------------ -------------
Stockholders' equity:
Serial preferred stock, $1 par value;
Authorized 100,000 shares; issued none
Common Stock - $.02 par value; authorized
25,000,000 shares; issued and
outstanding 5,485,000 109,000 91,000
Additional paid-in capital 43,991,000 43,280,000
Less: 40,000 shares of
Treasure stock at cost (42,000) (42,000)
Deficit (39,399,000) (38,022,000)
------------ -------------
Total stockholders' equity 4,659,000 5,307,000
------------ -------------
Total $ 12,442,000 $ 12,242,000
============ =============
See notes to condensed consolidated financial statements.
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HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenue $ 2,000,000 $ 1,100,000 $ 6,251,000 $ 3,246,000
Operating revenue - related parties - -- 773,000 -- 2,358,000
Conversion and Sale of Securities -- -- -- 166,000
Interest and other income -- 14,000 9,000 43,000
----------- ----------- ----------- -----------
2,000,000 1,887,000 6,260,000 5,813,000
----------- ----------- ----------- -----------
Costs and expenses:
Direct service expense 1,007,000 1,214,000 2,974,000 3,015,000
Selling, general and
Administrative expense 1,011,000 1,161,000 3,885,000 3,820,000
Interest 119,000 95,000 321,000 385,000
Research and development 99,000 23,000 362,000 145,000
Provision (recovery) for loss
and other professional
association revenues -- (234,000) 96,000 (1,129,000)
Cost incurred in connection with
litigation -- 20,000 -- 20,000
----------- ----------- ----------- -----------
2,236,000 2,279,000 7,638,000 6,256,000
----------- ----------- ----------- -----------
Net Income (Loss) $ (236,000) $ (392,000) $(1,378,000) $ (443,000)
=========== =========== =========== ===========
Net earnings(loss) per share (.04) (.11) (0.25) (0.16)
=========== =========== =========== ===========
Weighted average number of
Common and Common
equivalent shares outstanding 4,957,000 3,695,000 4,957,000 2,692,000
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,378,000) $ (443,000)
Adjustments to reconcile net earnings
(loss) to net cash used in operating activities:
Depreciation and amortization 934,000 537,000
Amortization - Consulting 99,000
Provision (recovery) for bad debts (744,000)
Securities issued for services 150,000 739,000
Lease obligations (376,000) (402,000)
Change in assets and liabilities:
(Increase) decrease in accounts receivable (855,000) 782,000
(Increase) in inventory 21,000 (3,000)
(Increase) decrease in prepaid expenses and other 71,000 (669,000)
(Increase) decrease in other assets (124,000) (71,000)
Increase in accounts payable and accrued expenses 141,000 451,000
Increase (decrease) in accrued salaries and payroll taxes 83,000 (21,000)
----------- -----------
NET CASH PROVIDED BY(USED IN)
OPERATING ACTIVITIES (1,234,000) 156,000
----------- -----------
INVESTING ACTIVITIES:
Purchase of Physician Association -- (2,954,000)
Capital expenditures, net -- (239,000)
Collection of Notes Receivable -- 255,000
----------- -----------
NET CASH PROVIDED BY INVESTING
ACTIVITIES -- (2,938,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from sale of common stock 2,000,000
Conversion of Debt to Equity 319,000 3,000,000
Additions to long term debt 2,036,000
Discounts for Notes Payable 42,000
Repayments of long term debt and
current maturities, net (193,000) (3,520,000)
Proceeds from long-term borrowing 976,000
Cash Received from (paid to)
Factor, net 115,000 (389,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,217,000 3,169,000
----------- -----------
NET INCREASE (DECREASE) IN CASH (17,000) 387,000
CASH AT BEGINNING OF PERIOD 49,000 20,000
----------- -----------
CASH AT END OF PERIOD 32,000 $ 407,000
=========== ===========
</TABLE>
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HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. General
-------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1997 . These statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996.
2. Litigation and other Contingencies
----------------------------------
In 1993, the SEC advised the Company that it had commenced a formal
investigation of potential securities law violations in connection with certain
trading activity in the Company's securities and has requested certain
information from the Company and certain of its officers in connection with that
investigation. The Company and its officers have complied with these requests.
In September 1996, the SEC settled its administrative proceedings with HPI's
former Chairman (who left the Company effective August, 1992) and others who
were alleged to have unlawfully traded in HPI's common stock. Neither the
Company itself, nor any of its current officers or directors were implicated in
the SEC investigation.
3. Prepaid Expenses - Consulting
-----------------------------
The Company entered into a consulting agreement with Thomas Capital Funding
Group, pursuant to which the Company agreed to issue 100,000 shares of common
stock of the Company, in consideration for consulting services to be provided
over a three year period. Under the terms of this agreement, Thomas is to
consult with the Company concerning management, marketing, financial and
strategic planning, expansion of services and shall advise the Company regarding
its needs.
4. Conversion of Debt to Equity
----------------------------
The Company's Board of directors approved an agreement to convert $250,000
of debt owed for deferred compensation to shareholders' into 462,963 shares of
the Company's common stock valued at .54 a share, representing a 30% discount
from market at the time the transaction was concluded. These shares are subject
to Rule 144 restrictions. The Board also agreed to issue an aggregate of 200,000
7
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shares of the Company's stock in exchange for a reduced cash fee agreement for
certain legal services rendered as well as services to be rendered for the 1997
calendar year.
8
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HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
BACKGROUND AND BUSINESS PLAN DEVELOPMENT
CSI currently operates five medical clinic and research sites located in
Florida (Fort Lauderdale, Miami Beach), California (Irvine, Los Angeles, ) and
Illinois (Chicago). The Company had Independent Practice Affiliation (IPA)
agreements with physician's professional corporations to utilize these
facilities prior to January 1, 1996. On January 1, 1996, the Company purchased
the medical practices in Fort Lauderdale and Miami. On April 1, 1996, the
Company purchased the medical practice in Chicago. On September 30, 1996, the
Company created a Management Service Organization in California, which purchased
the medical practice operations in Irvine and on October 28, 1996 the Company
purchased medical practice operations in Los Angeles, which had not previously
been affiliated with the Company.
Management believes that owning the Company's affiliated medical practices
or medical practice operations, where permitted by law, will increase its
ability to deliver comprehensive integrated medical and clinical trials
services, will result in more cost-efficient management of the practices and
will allow better utilization of its standards-of care algorithms to improve
health care outcomes.
The transition to ownership of the practices had unexpectedly but
temporarily impaired practice operations in Ft. Lauderdale and Miami, with a
materially significant negative impact on revenues derived from those facilities
during the later half of fiscal 1996 and the first quarter of fiscal 1997.
Management has been working to restore these revenues and its efforts are
resulting in continuing improvement in the practice operations.
In addition, the Fort Lauderdale and Miami sites will benefit from their
selection to participate in five large clinical trials, the Immune Response
Corporation's HIV-1 Immunogen trial, Bristol-Myers Squibb's two lobucovair
trials and Dupont Merck's DMP-266 trial. Patient recruitment into these trials
started to occur during the second and third quarters of fiscal 1997 and full
enrollment is expected to have a material effect on revenues for fourth quarter
of fiscal 1997 and fiscal 1998. Although the Company has historically achieved
full enrollment into its clinical trials, it can give no assurances full
enrollment will be achieved.
In addition, physician practices located in Florida, California, Virginia,
Texas, Pennsylvania, Maine, Washington, DC and New York are affiliated with the
CSI network and utilize CSI services to varying degrees.The Company's principal
business objective is to extend the full capabilities of its Information
Technologies system (ITS) to all its currently affiliated sites and to expand
the number of owned and affiliated sites. Management believes that this will
increase its revenue base to meet its central operating and development expenses
and will then generate substantial operating profits. The extension of the ITS
to all affiliated sites will allow the Company to provide more comprehensive
services to these sites, thereby increasing the revenue earned from each. The
9
<PAGE>
expansion of owned and affiliated sites will create further market outlets for
the Company's services and allow greater market capture of the underlying
populations requiring those services. The expanded network will be positioned to
capture health services contracts as a national managed care disease-specific
provider, will provide larger economies of scale, will provide more clinical
data for medical and financial analysis and will allow CSI to conduct larger
clinical trials. The new Los Angeles site and the new clinical trials which
commenced during the second quarter of fiscal 1997 represent the accomplishment
in part of this objective.
RESULTS OF OPERATIONS
The Company's total facilities revenues are derived from provision of
physician medical services (where allowed by law) practice management services,
diagnostic laboratory services and other ancillary medical services to the
patients of medical practices owned by CSI and to the medical practices
affiliated with CSI.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 97 June 30, 96 June 30, 97 June 30, 96
Total Facilities Revenues $1,583,000 $1,652,000 $5,147,000 $4,529,000
Clinical Trials and Other 417,000 221,000 1,104,000 1,075,000
---------- ---------- ---------- ----------
$2,000,000 $1,873,000 $6,251,000 $5,604,000
========== ========== ========== ==========
Total facilities revenues decreased by $69,000 and increased by $619,000 for the
three and nine months ended June 30, 1997, as compared to the same period in
1996. The decrease was due to the discontinuing of the San Diego facility and
was offset by an increase in lab and infusion revenue from other sites. Although
the San Diego site made a modest contribution to revenue, it made only a minimum
contribution to earnings and required extensive cash flow support. Accordingly
management made the decision not to renew the affiliation contract at the end of
the last quarter.
The increase in clinical trials and other revenue of $196,000 and $29,000
for the three and nine months ended June 30, 1997 is due to the continuing
enrollment into prior trials and the initiation of new contracts.
Interest and other income decreased by $34,000 for the nine months June
30, 1997 as compared to the nine months ended June 30, 1996. The decrease is due
to a decrease in the note receivable from the sale of the discontinued
operations.
10
<PAGE>
Direct service expense as a percentage of operating revenues was 50% and
48% for the three and nine months ended June 30, 1997, as compared to 65% and
54% for the three and nine months ended June 30, 1996.
Selling, general and administrative expenses decreased by $150,000 (13%)
and increased by $65,000 (2%) for the three and nine months ended June 30, 1997
as compared to the three and nine months ended June 30, 1996. The increase
relates primarily to an increase in depreciation and amortization and other
expenses related to the purchases of the various clinics in fiscal year 1996 and
the purchase of the Los Angeles clinic in November of 1996.
For the nine months ending June 30, 1996, the Company decreased PA
Physician Association reserves by $1,129,000 due to an increase in
collateralization of the receivables provided by the Chairman of the Company and
by one of the former CSI shareholders who is now a director of the Company for
advances and other professional association reserves owed by them to the
Company. The reserve balance had been established in part for advances of
start-up expenses to develop four of the Company's affiliated medical practices
and for other receivables due to the Company. These collaterized receivables
have since been paid in full. This compares to an increase in the reserve
balance at June 30, 1997 of $96,000 to reflect the uncollaterized portion of
receivables due from the professional corporations in California.
Interest and factoring fees decreased by $64,000 for the nine months ended
June 30, 1997, as compared to the nine months ended June 30, 1996. The decrease
was primarily related to the decrease in interest due to CSI shareholders and to
a decrease in factoring expenses.
The Company incurred research and development expenses of $99,000 and
$362,000 for the three and nine months ended June 30, 1997, as compared to
$23,000 and $145,000 for the three and nine months ended June 30, 1996.
The Company sustained a loss from continuing operations of $236,000 and
$1,378,000 for the three and nine months ended June 30, 1997, as compared to a
loss of $392,000 and $443,000 for the three and nine months ended June 30, 1996.
The results for the three and nine months ended June 30, 1996 were significantly
impacted by reversal of reserves of $234,000 and $1,129,000, as noted above.
11
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of June 30, 1997, the Company had stockholders' equity of $4,659,000
and a working capital deficit of $1,082,000 as compared to stockholders' equity
of $5,189,000 and working capital of $806,000 at June 30, 1996.
The Company used cash in its operating activities of $1,234,000 and
provided for cash of $156,000 for the nine months ended June 30, 1997 and June
30,1996. The cash used was primarily as a result of the net loss. Financing
activities consist of cash from the proceeds of convertible debentures and cash
received from the Factors. The Company anticipates that cash will continue to be
used in its operating activities during the remainder of fiscal 1997, although
the Company cannot reasonably estimate how long it will be able to satisfy its
cash requirements..
CSI and certain medical professional associations under contract with
subsidiaries of CSI are a party to a $2,500,000 factoring agreement. The
agreement provides for factoring of eligible receivables of which funds are
advanced by the factor at 2% over prime. Management believes that available
cash, including available borrowings from the factoring agreement will be
sufficient to satisfy the Company's working capital requirements for fiscal
1997.
The Company is continuing its efforts to expand its network of
company-owned facilities and is acquiring established physician practices
despite its deficit in working capital. Certain start-up and acquisition costs
increase the Company deficit in working capital, which deficits should
ultimately be offset by increased clinical services revenues and revenues from
clinical research trial contracts that the Company has recently received. The
research studies include the Immune Response Corporation's HIV-1 Immunogen
trial, Bristol-Myers Squibb's Lobucovair trials and Dupont Merck's DMP-266.
The Company has restructured and consolidated its personnel
responsibilities over the last several months to reduce the salary and other
related expenses and to improve the efficiency of its operations. salary and
benefit savings from these changes have commenced from this quarter and will be
fully recognized in the third quarter of fiscal 1997. For the fiscal year ending
September 30, 1997, the Company expects a net reduction of salaries and related
expenses, after certain salary increases, of approximately $383,000 with
annualized savings of approximately $532,000.
In addition the Company has relocated its Ft. Lauderdale, Florida clinical
laboratory and corporate operations, which would result in a net reduction of
rent expenses of approx. $300,000 per year commencing in the fourth quarter of
fiscal 1997.
12
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During April and May 1997, the company received proceeds of $376,334 in
convertible loans in a series of convertible debentures issued under Regulation
D. The unconverted balance of one loan for $50,000 bears interest at 5% per
annum and will become due on August 2001, and the unconverted balance of the
other loans bear interest at 7% per annum and will become due in April and May
1999. Proceeds of the loans have been used for general working capital.
In order to continue as a going concern in 1997, the Company must generate
cash flow from operations, continue its arrangement with the Company's factor
(in connection therewith the Company's Chairman has provided the Factor with his
personal guarantee), produce additional revenues from its previously established
and new medical facilities, its new clinical trials or raise additional cash
from the sale of stock or debt. No assurances can be made that the Company can
obtain additional sources of capital or that operations can produce positive
cash flow in the immediate term. The Company is continually evaluating all
options available to it, including but not limited to continued staff
reductions, working with vendors to obtain extended credit terms, curtailment of
certain operations, increasing revenues at existing facilities and protection
under creditor's rights laws.
13
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Impact of Inflation
-------------------
The cost of the Company's operations are not significantly affected by
inflation. The Company believes that the shift from commercial insurance to
managed care contracts will have the impact of increasing direct costs in
relation to revenues as certain of the rates charged for the Company's services
are expected to decline.
Other
-----
The Company does not anticipate making any material expenditures in
connection with environmental or occupational safety regulation compliance.
Although the Company anticipates opening additional facilities in the future, it
has not made any material capital expenditure commitments as of this date in
connection with those potential facilities.
The foregoing information includes forward looking statements, including
but not limited to, risks related to the Company's business plan strategy,
substantial competition, reliance on key personnel, control by management and
possible volatility of stock price.
14
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HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant HEALTH PROFESSIONALS, INC.
August 19, 1997 /s/ William M. Reiter
---------------------
William M. Reiter
President and Chief Executive Officer
August 19, 1997 /s/ Gary M. Cedeno
------------------
Gary M. Cedeno
Principal Accounting Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTH PROFESSIONALS, INC., FOR THE NINE MONTHS ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 32
<SECURITIES> 0
<RECEIVABLES> 6,215
<ALLOWANCES> 1,935
<INVENTORY> 87
<CURRENT-ASSETS> 4,634
<PP&E> 3,008
<DEPRECIATION> 2,095
<TOTAL-ASSETS> 12,442
<CURRENT-LIABILITIES> 5,716
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 4,550
<TOTAL-LIABILITY-AND-EQUITY> 12,442
<SALES> 6,251
<TOTAL-REVENUES> 6,260
<CGS> 0
<TOTAL-COSTS> 7,638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> (1,378)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,378)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,378)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
