SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10966
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HEALTH PROFESSIONALS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 11-3076108
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2601 East Oakland Park Blvd. - Suite 300, Fort Lauderdale, Florida 33306
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 766-2552
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, NASDAQ BULLETIN BOARD
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par value $.02 per share (Name of Each Exchange on
(Title of Class) which Registered)
Securities registered pursuant to Section 12(g) of the Act:
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TO PURCHASE COMMON STOCK
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(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of January 9, 1998, the aggregate market value of voting stock held by
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non-affiliates of Health Professionals Inc. (the "Company") was $ 1,413,000.
As of December 31, 1997, the number of shares outstanding of the Company's
Common Stock, par value $.02 per share, was $5,445,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS
General Business Description
The Company was formed pursuant to the laws of the State of New York in
1975 under the name Health Extension Services, Inc. In fiscal 1986, following
the merger of its primary operating subsidiary into itself, the Company changed
its name to Professional Care, Inc. ("PCI"). On November 25, 1991, the
shareholders of the Company approved a merger and restructuring whereby each
share of PCI common stock was exchanged for a share of common stock of Health
Professionals, Inc. ("HPI"), a Delaware corporation formed on August 12, 1991
for the purpose of the restructuring. PCI became a wholly-owned subsidiary of
HPI, and the existing subsidiaries of PCI also became subsidiaries of HPI. HPI
and its subsidiaries (and any subsidiaries of such subsidiaries) are sometimes
hereinafter collectively referred to as the "Company." The executive offices of
the Company are located at 2601 East Oakland Park Boulevard, Suite 300, Fort
Lauderdale, Florida 33306. The Company's telephone number is (954) 766-2552.
In December, 1991, the Company acquired 100% of Center for Special
Immunology, Inc., a Delaware corporation ("CSI") and its subsidiaries which have
since become the only operating businesses of the Company. CSI owns and
operates an integrated health care delivery and clinical research system that
includes a multi-state network, operating in 9 states, of primary care and
clinical research facilities specializing in immune system disorders, consisting
primarily of HIV, AIDS and Chronic Fatigue Immune Dysfunction Syndrome (CFIDS).
The network also conducts multi-center trials in cooperation with biotechnology
and pharmaceutical companies. CSI was founded in 1986 by William M. Reiter,
M.D., FACP, and Paul J. Cimoch, M.D., FACP, who are both internationally
recognized research physicians. Dr. Reiter is currently Chairman of the Board
and Dr. Cimoch also currently serves on the Board.
General
CSI owns and operates an integrated health care delivery and clinical
research system that includes a multi-state network of
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primary care and clinical research facilities specializing in immune system
disorders consisting primarily of HIV, AIDS and CFIDS. The network also conducts
multi-center clinical trials in cooperation with biotechnology and
pharmaceutical companies. The Company became engaged in this health care
delivery and research business in December 1991, when it acquired all of the
stock of CSI.
Historical outcomes analysis has demonstrated that the course of HIV
disease can be profoundly and positively altered by the use of early
intervention strategies and by preventive treatment directed against
opportunistic infections. Through its efforts in research and practical
application, CSI has developed protocols for the treatment of HIV patients.
These protocols specify the treatments and therapies to be provided to HIV
patients, depending on the stage of the disease as determined by a
multi-parametric evaluation of clinical status, viral activity and immunologic
function. Treatment of HIV patients at CSI facilities by their affiliated
physicians is offered in accordance with these protocols. CSI has also developed
research protocols which govern the processes and record keeping practices to be
followed in specified studies performed by CSI. These studies may be undertaken
at CSI's initiative or in conjunction with a separate organization (e.g., a
pharmaceutical company), which would typically finance the study and pay certain
fees to CSI in return for conducting its portion of the clinical trial.
CFIDS is believed to result from a genetic failing occurring in the immune
response genes. This defect, when coupled with certain viral infections or other
activating factors, leads to a state of chronic immune activation, which causes
a variety of symptoms, including profound fatigue. CSI has developed treatment
protocols for chronic fatigue patients, the goal of which is to re-balance the
immune system or otherwise alleviate symptoms.
Services provided by CSI (including its CSI Clinical Facilities, CSI
Clinical Laboratories, Inc., CSI Therapeutics, Inc., CSI Clinical Trials, Inc.
and CSI Managed Care, Inc. subsidiaries) have accounted for all of the Company's
operating revenues from continuing operations since the Company acquired CSI.
Organization and Operation
The Company through CSI owns and operates 5 facilities (hereinafter the
"Clinical Treatment Facilities"), located in Ft. Lauderdale, Fla., Miami, Fla.,
Chicago, Ill., Irvine, CA, and Los Angeles, CA. CSI Clinical Laboratories, Inc.
("CSI Clinical Laboratories") is a licensed clinical laboratory that currently
provides services to CSI's network of clinical facilities. CSI Therapeutics,
Inc. ("CSI Therapeutics") provides pharmaceutical distribution, home care and
infusion care in connection with the operation of CSI's facilities. CSI Clinical
Trials, Inc. ("CSI Clinical Trials") conducts multi-center clinical trials for
biotechnology and pharmaceutical companies as well as its own
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internally developed treatment protocols. CSI Managed Care, Inc. ("CSI
Managed Care") markets and administrates managed care contracts with third party
payers, including preferred provider organizations, health maintenance
organizations and self insured organizations.
Each of the Clicinal Treatment Facilities is owned by a wholly-owned
subsidiary of CSI. In states where the corporate practice of medicine is
permitted, CSI employs physicians to render medical services to its patients. In
states where the corporate practice is not permitted, a medical professional
association (the "PC") enters into an Independent Practice Affiliation Agreement
(IPAA) with CSI to utilize the facility in order to provide care to its patients
with immunological and related diseases. The Company had IPAA for utilization of
each of these facilities prior to January 1, 1996. On January 1, 1996, the
Company purchased the medical practices affiliated with the Fort Lauderdale and
Miami facilities. On April 1, 1996, the Company purchased the medical practice
affiliated with the Chicago facility. On September 30, 1996, the Company created
a Management Service Organization in California, which purchased the medical
practice operations affiliated with the Irvine and Los Angeles, California
facilities.
Under the IPAA, CSI provides a non-exclusive license to utilize the
facility, cognitive services and practice management services to the PC,
including: (i) the use of the facility for treatment of its patients; (ii)
management, administration and support services, including but not limited to
case management, financial and business management, accounting, marketing and
bookkeeping; (iii) professional personnel for support services, including,
nurses, physicians assistants and other non-physician personnel; and (iv) access
to and the use of treatment protocols and research data developed by CSI. In
addition, CSI provides the PC with the opportunity to participate in
multi-center clinical trials through CSI Clinical Trials, Inc., which CSI
Clinical Trials, Inc. may have under contract from time to time or which CSI
maybe conducting as part of its own research efforts.
The PC is responsible for employing all professional personnel and
maintaining its own malpractice insurance as well as for maintaining the quality
of medical care offered at the facility.
Under the IPAA'S, (i) facility management fees are charged to the PCs by
CSI at cost plus 10% on direct expenses and corporate overhead. Network
participation fees are charged to the PCs at 10% of net PC revenues; (ii) CSI
was reimbursed for a portion of its corporate overhead related to other services
provided to the facilities through December 31, 1995;(iii)CSI received a network
participation fee equal to 7 1/2% percent of the total net revenues of the PC
for provided medical and related sources, including hospital procedure revenues,
clinical practice revenues and in office therapeutic revenues, through December
31, 1995; and (iv) On January 1, 1996, CSI combined the corporate overhead and
network participation fee into one network participation fee, representing 10%
of the total net revenues of the PC. Revenues increased in fiscal year 1996 and
1997 under the new form of contract and management believes the new contracts
provided for an improved business relationship with the PC's.
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The purchases of the Fort Lauderdale, Miami, Chicago, Irvine and Los
Angeles practices have substituted the fees charged on direct expenses, and
network participation fees for patient revenues. Management believes that by
owning these practices not only will the Company increase its revenues, but the
Company will be able to better control the operations of the medical practices.
In April 1996, the Fort Lauderdale clinic's independent contractor physician
relocated to an unaffiliated practice in Fort Lauderdale and took with him a
majority of the Fort Lauderdale facility's patients. The Company has relocated
the Fort Lauderdale Clinical Treatment Facility and has instituted a market
program to rebuild the patient base of this facility.
The Company expects that its marketing efforts will allow it to rebuild the
Ft. Lauderdale site's patient base. In addition, the Fort Lauderdale clinic was
awarded $169,000 in Ryan White Care funding by the Broward County Commission in
February of 1997 which is expected to be earned over a twelve month period in
order to provide primary care and support services to medically indigent HIV
patients. The first patients using the Ryan White funding were seen in the Fort
Lauderdale clinic in October of 1996. Management believes that the Ryan White
grant will continue to bring new patients to the Fort Lauderdale facility. In
addition, the CSI Fort Lauderdale Clinic has applied for $240,000 in funds for
1998 and they expect to receive a decision from the county in January 1998.
The Ryan White Care Act was introduced in 1990 as a means of providing
primary care and support services to medically indigent HIV patients through
federal funding. Ryan White support accounts for over $205 million in annual
funding, which is apportioned to areas hardest hit by the epidemic. Broward
County's 1996 share of Ryan White funding is approximately $5.8 million. This
marks the first time that CSI has applied for government funding designated for
the treatment of HIV/AIDS patients. Following the success of its first
application, CSI intends to expand its participation in the Ryan White program
and apply for such grants for all of its sites nationally. The Company has
applied for an additional grant for its Fort Lauderdale facility and for an
initial grant for its Miami Clincial Treatment Facility. The Company can
give no assurances that additional grants will be awarded.
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In applying for the Ryan White funding, CSI proposed providing
comprehensive ambulatory treatment services for the medically indigent HIV+
population in Broward County. Cost savings resulting from CSI's integrated care
model will allow it to care for a greater number of patients for the same total
dollars than could its competitors for the funding. CSI won the support of
government officials and local commissioners, who saw the need to expand
treatment options for this patient population in a fiscally prudent manner.
In addition to the corporately owned medical practices and the IPAA's which
are in place in CSI's company owned facilities, CSI has developed a form of
Independent Practice Affiliate Agreement for its affiliations with medical
practices that own and operate their own facilities (hereinafter the "Privately
Owned Facility IPAA"). Under the Privately Owned Facility IPAA, CSI offers the
Independent Practice Affiliate a variety of services with the option of
utilizing some or all of the cognitive, research, and practice management
services which CSI makes available to its wholly owned facilities. CSI does
not own an interest in or control any of the Privately Owned Facilities. The
Privately owned Independent Affiliate may contract to utilize any or all of the
following services:
i) An affiliation with CSI Managed Care, Inc. under which CSI will market
managed care services to national and regional payers, self insured employers
and HMO's and negotiate rates and contracts with said third party payers;
ii) A research affiliation with CSI Clinical Trials, Inc. under which the
Independent Physician will participate with CSI Clinical Trials in clinical
studies conducted for independent third parties or for CSI own internally
developed protocols;
iii) Case management services and/or the implementation of in office
therapeutics;
iv) An affiliation with CSI Clinical Laboratories, Inc. under which CSI
Clinical Laboratory will act as the independent facilities primary laboratory;
and
v) A practice management affiliation under which CSI will bill and collect
for services rendered by the PC and make available to PC if requested, the use
of CSI's blanket factoring agreement with its factor.
CSI has entered into Privately Owned Facility IPAA's with established
medical practices in Philadelphia, New York City, Tampa, Los Angeles, Denver,
Chicago and Hampton, VA. The expansion of the IPAA network enables CSI to
conduct larger, multi-center clinical research trials and ultimately will allow
CSI to compete more effectively for national HIV disease-specific managed care
contracts and increases the information available for analysis under CSI's Data
Management Analysis and Royalty Agreement with the Center for Health Outcomes
and Economics, Inc., ("CHOE"), a wholly owned subsidiary of the Bristol-Myers
Squibb Company.
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Support Services
In addition to providing and updating treatment and research protocols, CSI
also offers other ancillary support services to its facilities. These currently
include laboratory, pharmaceutical distribution, home care, out-patient infusion
services, clinical trial services and a managed care network. These ancillary
support services consist of the following:
1. Laboratory Services: CSI Clinical Laboratories is a licensed clinical
laboratory, operated to research standards. It currently provides
services to CSI's network of clinical facilities and CSI's Privately
Owned Facility Independent Practice Affiliates. The laboratory
specializes in hematology, immunogenetics and diagnostic immunology;
with particular expertise in flow cytometery and immunoassay. General
laboratory work is provided by a sub-contract with a national
reference laboratory. Laboratory result reporting from all sources is
through CSI's integrated information technologies system. All
information is archived in relational data bases, enabling customized
clinical presentation and post hoc research analysis.
2. Therapeutic Services: CSI Therapeutics is the umbrella subsidiary for
pharmaceutical distribution, home care and infusion care. Parenteral
pharmaceutical distribution is made to PA's for in office use of
injectable medications by the PA. Oral pharmaceutical distribution is
made to PA's for dispensing by the PA in accordance with applicable
regulations. Home health care and out-patient infusion care is
available to patients of the PA through CSI, primarily via a national
sub-contract arrangement with unaffiliated home health care companies.
3. CSI Clinical Trials: CSI's Clinical Trials Division is responsible for
protocol review, budget development and presentation to the clinical
network of all Clinical Trials conducted for biotechnical or
pharmaceutical companies or CSI's internally developed protocols.
Research physicians and protocol specialists in the Clinical Trials
Division oversee study initiation, quality assurance, administrative
and regulatory matters. All source documentation from study sites
utilizing CSI's Affiliated Physicians Network will be captured on CSI
Information Technologies System clinical and research templates. Data
will be monitored centrally, automatically extracted to study case
report forms and transferred to sponsors for interim analysis. Manual
transcription of data from source documents to case report forms and
to the sponsor's computer data bases will be obviated. All information
will be transformed into electronic records, with security standards
making them acceptable for submission to governmental regulatory
agencies.
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4. CSI Managed Care: CSI Managed Care, Inc. markets and administrates
discounted fee for service relationships with third party insurers,
preferred provider organizations, health maintenance organizations and
self insured organizations. Once negotiated, the contracts are made
available to CSI's Independent Affiliated Physicians Network whose
physicians have the opportunity to accept or decline the contract.
Once it has accepted a contract, the Affiliate agrees to honor the fee
structure throughout its term.
CSI Managed Care, Inc. has entered into a Data Management Analysis and
Royalty Agreement with CHOE, a wholly owned subsidiary of the
Bristol-Myers Squibb Company under which CSI received $350,000 of
income in fiscal year 1995 for the sale of its historical data on
treatment outcomes for various treatment protocols. In addition, CSI
Managed Care will receive 50% of all net profits after expenses upon
CHOE's resale of all or portions of this data to third parties, if
any. CSI Managed Care intends to develop capitated care programs which
can be marketed independently or in conjunction with pharmaceutical
and other service providers.
In an April 1996 report by KPMG Peat Marwick LLP, CSI was cited as
providing an ideal model for HIV care. The report, "Integrated Patient
Care: Managing Health Care Costs, Maximizing Health Care Value and
Quality", stated that CSI's HIV disease management program "works
specifically because treatment of HIV involves a wide range of
medical, pharmaceutical, research and social services, which, when
integrated within a single facility, work together to help prevent
progression of the disease, lower treatment costs and permit
prospective cost management." The report continues to state that
"Results show that CSI patients continue working and experience
improved quality of life. Moreover, careful monitoring, preventive
care, aggressive prophylaxis combined with strong case management
reduces overall cost of care."
Marketing
CSI targets its marketing efforts to a number of audiences, including third
party payers, prospective patients, physicians, and pharmaceutical and
biotechnology companies. Marketing to prospective patients is primarily in the
form of media advertising and seminars conducted for appropriate consumer
groups. CSI maintains its presence among physicians through articles in trade
journals written by CSI physicians as well as through presentations at domestic
and international conventions.
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CSI continues to direct its marketing efforts to address third party
insurance companies, preferred provider organizations, health maintenance
organizations, and self-insured companies including the negotiation of managed
care contracts with some of these groups.
In addition to the above, the Company also markets its services to
pharmaceutical and biotechnology companies in an effort to generate additional
revenues by performing research studies for those companies. Marketing efforts
in this area consist primarily of meetings with executives of such companies
where CSI marketing personnel can demonstrate that due to its large patient base
as well as the successful completion of similar studies in the past, CSI is well
suited to perform studies required by health care companies to obtain
governmental approval for new drugs or other therapies geared toward patients
with immunological and related diseases.
The Company's strategy is to expand its clinical network, to actively
pursue clinical research studies and to contract with managed care companies and
self-insured employers. The Company feels that this approach offers long term
strategic advantages to facilitate growth as the market for immunologic research
and treatment continues to rapidly expand.
Research
The Company has 7 scientific and medical employees who spend a significant
portion of their time on research-related projects for the Company.
In June of 1996, the Company together with collaborators filed a patent
application for a method to isolate, culture and propagate the hepatitis E
virus(HEV). This method generally relates to the field of immunization against
viral diseases and the serological diagnosis of these diseases. In the event a
patent is granted, it would allow for the exclusive right to develop, market and
implement the invention for 18 years. HEV is one of the leading causes of acute
hepatitis in the developing world, especially in parts of Asia, Africa and South
America. An estimated 25% of cases of acute viral hepatitis in Egypt are due to
HEV infection. HEV can lead to death in up to 20% of infected pregnant women.
The ability to isolate, propagate and maintain disease-causing viruses for
experimentation has been an important first step in creating vaccines and
manufacturing kits for serological diagnosis of those diseases. The patent
office has initially found that certain claims in the application may be
eligible for patent protection and has requested additional information from CSI
which CSI has supplied. Despite these preliminary findings, the Company can give
no assurances that the patent will be approved.
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The company has ongoing clinical trials with the Immune Response
Corporation's HIV-1 Remune(TM) and Dupont Merck's Sustiva(TM). Enrollment in
Remune(TM) is closed and retention of patients will have a material effect on
revenues throughout the year. The Sustiva(TM) clinical trial is expected to have
ongoing enrollment throughout the second and third quarter of 1998. Enrollment
and retention of patients in the Sustiva(TM) clinical trial will have a material
effect on revenues throughout the year. It is anticipated that both of these
clinical trials will continue through the end of 1998.
CSI Chicago has signed a contract with Glaxo Wellcome for a clinical trial
to begin the first quarter of 1998. Although the company has historically
achieved full enrollment into its clinical trials, it can give no assurances
full enrollment will continue to be achieved.
Although advances have been made in the treatment of HIV disease,
relatively little research is being conducted toward benefiting those patients
who will continue to develop advanced AIDS. The Company's ongoing research
program in immune reconstitution, cooperatively supported by the CSI Foundation,
continue to place it in the forefront of developing research designed to treat
advanced AIDS.
Government Regulation
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which CSI operates will not change
significantly in the future. In general, regulation of health care companies is
increasing. The Company at certain times has been, currently is, or may in the
future become, subject to certain federal and state laws and regulations that
restrict physician self-referral, prohibit the payment or receipt (or offer or
solicitation) of any remuneration in exchange for or to induce the referral of
patients or the purchase of health care items or services, require laboratories
to accept Medicare or Medicaid reimbursement as payment in full, and impose
certain other requirements with respect to billing and collection. These laws
and regulations are complex and subject to continuous interpretation by the
federal and state agencies that administer them, and could be deemed to
encompass practices of the Company that previously may not have presented
compliance concerns. The Company has sought to conform its operations to the
requirements of these laws. In the event the Company was deemed not to have
complied with such laws, it could be subject to substantial penalties which, if
imposed, would have a material adverse effect on its results of operations and
financial condition.
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1. Description of Certain Licensing, Certificate-of-Need, and Other Laws and
Regulations.
Every state imposes licensing requirements on individual physicians and
on many health care facilities and/or services to which physicians refer,
including certain facilities operated, and certain services offered, by the
Company. In addition, many states require regulatory approval, including
certificates-of-need, before establishing certain types of health care
facilities, offering certain services, or making expenditures in excess of
statutory thresholds for health care equipment, facilities, or programs.
Since entering into service agreements with CSI, neither the PA's nor the
CSI facilities have been required to obtain certificates of need for their
operations. In connection with the expansion of existing operations and the
entry into new markets, the Company and its affiliated practice groups may
become subject to compliance with additional regulations. The Company believes
its operations are currently in material compliance with applicable licensing
laws. The ability of the Company to operate profitably will depend in part upon
the Company and its affiliated facilities obtaining and maintaining all
necessary licenses, certificates of need and other approvals and operating in
compliance with applicable health care regulations.
The laws and/or regulations of many states prohibit physicians from
splitting fees, or giving or receiving rebates or other forms of compensation
for services not actually rendered by the licensee. Additionally, a number of
states prohibit non-physician entities (such as the Company) from practicing
medicine and, in certain circumstances, from employing physicians. The Company
believes its current and planned activities do not constitute fee splitting or
the practice of medicine as contemplated by these statutes. There can be no
assurance, however, that future interpretations of such laws will not require
structural and organizational modifications of the Company's existing
relationships with its facilities.
2. Description of the Stark Law and Certain State Self-Referral Prohibitions.
Certain prohibitions of federal law, commonly known as the "Stark Law,"
currently prohibit physicians from referring Medicare patients for clinical
laboratory and other designated health services including home infusion and
outpatient prescription drug services, if the referring physician (or a family
member) has a financial relationship (defined as an ownership or investment
interest or a compensation arrangement) with an entity, such as the Company,
that provides such services. The Stark Law contains numerous exceptions that
would permit otherwise prohibited referrals if all the requirements for the
exception are met. Among these are exceptions for certain qualifying
arrangements for space and equipment rental, provision of personal services, and
payment by physicians for items or services provided at fair market value.
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The Stark Law also applies to the entities to which physicians refer
patients. Under the Stark Law, affected entities are prohibited from billing
Medicare, Medicaid, or any other party for services furnished pursuant to a
prohibited referral. At the present time the Company does not provide designated
health services or otherwise financially related referrals for Medicare or
Medicaid patients from physicians who are stockholders of the Company.
The Stark Law also requires entities providing designated health services
to report to the Medicare authorities at the United States Department of Health
and Human Services ("DHHS") certain information concerning physicians (or their
family members) who may have ownership or compensation arrangements with
interest in such entities. In addition, regulations implementing the Stark Law
apply the statute to prohibit, among other things, the purchase of a
physician-owned laboratory from a referring physician unless, for a period of
six months after the transaction, the physician has no additional financial
relationship with the purchaser, except for relationships specifically excepted
under the statute. Violation of any of the Stark Law's provisions may result in
significant penalties, including denial of payment and civil money penalties of
up to $15,000 for each bill or claim improperly filed, up to $10,000 per day for
each day for which the required reporting has not been made, and possible
exclusion from the Medicare and Medicaid programs. The current prohibitions and
reporting requirements of the Stark Law, which have been applicable since
January 1, 1992 for clinical laboratory services and January 1, 1995 for all
other designated health services, do not apply to referrals for clinical
laboratory services furnished to a physician's non-Medicare or non-Medicaid
patients.
There are a number of federal legislative proposals that could further
restrict the ability of health care providers to refer patients to entities in
which the providers have a financial interest by, among other things, extending
Stark-like prohibitions to all referrals (not just referrals of Medicare or
Medicaid patients) made by financially interested physicians. There are also
proposals before Congress to narrow the scope of the current Stark Law,
including elimination of compensation arrangements from the definition of
financial relationships which trigger the referral prohibition. A number of
these proposals are tied to broaden federal budget congressional proposals. It
is not possible to predict the outcome of pending legislation and any impact on
the federal self-referral and regulations.
In addition to the federal Stark Law and federal "all payor" proposals, the
Company's operations are also subject to an increasing number of state
self-referral provisions that limit or ban referrals for some or all health care
items or services if the physician, or a family member, has an investment or
other financial relationship with the entity providing such items or services.
In states that have enacted such statutes, the provisions typically apply to all
payers. Florida, California, and Illinois, where the Company currently operates
clinic sites, all have enacted self-referral statutes, although the specific
prohibitions vary and are subject to numerous exceptions. For example, unless
one of the statutory exceptions is satisfied, the Florida statute prohibits
patient referrals for certain designated health services (including clinical
laboratory services), as well as referrals for other health care items or
services, if the referring physician or an immediate family member is an
investor in entities providing such items or services. Effective January 1,
1995, California law prohibits licensed health professionals, including
physicians, from referring patients for clinical laboratory or home infusion
services (among other services) if the licensee or a family member has a direct
or indirect financial interest in the entity receiving the referral. Since
January 1, 1993, Illinois has prohibited health care workers from referring
patients for health services to entities outside the worker's office or group
practice in which the worker is an investor, unless the work is personally
involved in providing care to the referred patient. Violations of these state
laws can subject entities to significant penalties.
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New York has enacted self-referral provisions. New York law forbids
practitioners authorized to order clinical laboratory services from making
referrals for such services if the practitioner or an immediate family member
has a financial relationship with a clinical laboratory or pharmacy services
provider to whom the referral is made.
The Company believes that its current operations are in compliance with the
Stark Law and state self-referral prohibitions within the states in which the
Company has operations.
3. Description of the Federal and State Anti-Kickback Statutes.
The Medicare/Medicaid "anti-kickback" statute imposes significant civil and
criminal sanctions for, among other things, giving or receiving any payment or
remuneration, whether direct or indirect, in cash or in kind, in order to induce
the referral of patients for items or services for which payment may be made by
the Medicare or Medicaid (or certain other federally-funded state health care)
programs. The term "remuneration" is not directly defined in the law, but has
been interpreted in the safe harbor regulations issued by the DHHS Office of the
Inspector General ("OIG"), and understood by government officials and the courts
to include, in addition to any kickbacks, bribes, or rebates, other payments of
any kind, including fees paid for services and "return on investment." Moreover,
this statute has been broadly interpreted by the courts, which have stated that
the law is violated if even one purpose (as opposed to the sole or the primary
purpose) of the remuneration is to induce the referral. While the item or
service must be reimbursable in whole or in part by Medicare or a state health
care program in order to trigger the statute, it is also well established that
no actual financial harm need result to the program in order for a violation to
be found.
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Because of the broad sweep of the statute, the OIG has adopted regulations
that create "safe harbors" for certain business practices or arrangements. Among
these are safe harbors for certain qualifying investment interests, space and
equipment leases, and personal services and management contracts. To benefit
from a safe harbor the practice or arrangement must meet all the regulatory
requirements. Failure to qualify for a safe harbor does not necessarily mean
that the practice is illegal; however, arrangements that are of the same general
type as those for which a safe harbor is available may be subject to scrutiny if
they fail to satisfy all the criteria for the appropriate safe harbor.
An increasing number of states, including California, Florida and New York,
have enacted anti-kickback provisions. These statutes, which can carry
significant civil and/or criminal sanctions, generally prohibit the payment of
remuneration, rebates, refunds, or other consideration, whether directly or
indirectly, as an inducement for referrals for health care items or services.
Unlike the federal anti-kickback statute, which is largely limited to referrals
for items or services paid by Medicare or Medicaid, state anti-kickback
provisions typically, though not always, apply to all payers. In many cases
there is little if any formal guidance provided by the courts on the reach of
many of these statutes. Because they serve a function analogous to the federal
anti-kickback provision, however, it is possible that state courts could apply
the principles and broad interpretation given to the federal statute.
Even where no separate anti-kickback provision has been enacted, the
professional licensing laws for most states, including some in which the Company
currently operates or intends to commence operations, incorporate provisions
that declare fee-splitting or the paying or receiving of kickbacks, rebates, or
other remuneration in exchange for referrals to be unprofessional conduct and
grounds for state disciplinary action by the licensing board.
4. Description re: Medicare/Medicaid Reimbursement.
Laboratories are required to bill Medicare or Medicaid directly and to
accept Medicare or Medicaid reimbursement as payment in full. In 1984, Congress
established a reimbursement fee schedule for clinical laboratory testing
performed for Medicare beneficiaries (excluding hospital in-patients). State
Medicaid programs are prohibited from paying more than the Medicare fee schedule
stipulates for testing for Medicaid beneficiaries. When initially established,
the Medicare fee schedules were set at 60% of prevailing local charges. Medicare
reimbursement rates for clinical laboratory testing subsequently have been
reduced several times pursuant to congressional mandate. The reductions in
Medicare reimbursement rates have been offset to some extent by increases in
both the national cap and local fee schedules tied to the Consumer Price Index
("CPI"). The above changes have not had, and are not expected by the Company to
have, a material adverse effect on the Company's results of operations. Any
further significant decrease in such fee schedules, however, could have a
material adverse effect on the Company.
<PAGE>
5. Description of Health Care Reform Efforts.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental changes. The Clinton
Administration had proposed comprehensive programs to reform the health care
system including: (i) increasing access to health care for the uninsured; (ii)
controlling the continued escalation of health care expenditures within the
economy, and (iii) using health care reimbursement policy to help control the
federal deficit. Some reforms which were under consideration included mandated
basis health care benefits, controls on health care spending through, among
other things, limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups, and fundamental changes to the health care delivery system. While the
Clinton Administration's reform proposals were not enacted in comprehensive
form, Congress did enact legislation, signed by President Clinton requiring the
portablity of health care coverage and there are continuing efforts, both by
Congress and the private sector, to limit health care costs, the outcome of
which is unknown at this time.
Without waiting for national health care reform efforts, various states,
including several in which the Company currently operates, have enacted, or are
considering enacting, their own health reform laws. Florida, for example, has
enacted its own package of reform measures, which includes establishment of a
state agency responsible for developing practice guidelines for a range of
procedures and services (including clinical laboratory services); establishment
and oversight of community health purchasing alliances; development of a basic
benefit package for the small group insurance market; and implementation of
Medicaid reform. Task forces and commissions also have been organized in New
York and other states for the purpose of evaluating various reform proposals and
making recommendations for state action.
The Company anticipates that Congress and state legislatures will continue
to review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues will likely continue in the
future. Due to uncertainties regarding the ultimate features of any reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted or what impact they may have on the Company. The actual announcement of
reform proposals and the investment community's reaction to such proposals,
announcements by competitors and payers of their strategy to respond to reform
initiatives and general industry conditions could produce volatility in the
trading and market price of the Company's Common Stock.
<PAGE>
FDA Approval. Development and marketing of new biological and drug products
is subject to strict regulation through the FDA. Such regulations relate
primarily to safety and efficacy of pharmaceutical products, but also govern
manufacturing, labeling, advertising and marketing.
In order to initiate clinical trials on a product, extensive basic research
and development information must be submitted to the FDA in an IND application.
The IND application contains a general investigational plan, a copy of the
investigator's brochure, copies of all the protocols for the planned studies, a
review of the chemistry, manufacturing and controls information for the drug,
pharmacology and toxicology information, any previous human experience with the
drug, results of preclinical studies and any other information requested by the
FDA.
If approval is obtained to proceed to clinical trials based on the IND
application, initial trials, categorized as Phase 1, are instituted. The initial
or Phase 1 trials are used to determine the general overall safety profile of
the drug. Once the safety of the drug has been established, Phase 2 and Phase 3
efficacy trials are conducted on expanded patient groups.
If Phases 1 through 3 are successfully completed, the data from these
trials are collected into an NDA, which is filed with the FDA in an effort to
obtain marketing approval.
Competition
With respect to its patient clientele, CSI competes with other physician
practices, independent physician associations (IPAs) and hospital-based or free
standing clinics, some of which are substantially larger than CSI's network. In
conducting clinical research, CSI competes with public and private medical
research companies and academic institutions, many of which have substantially
greater financial and technical resources than CSI and are solely focused on
clinical trial development.
Several major companies and organizations, both public and private, are
developing IPA networks solely to treat HIV disease. It is the intent of these
groups to then contract with managed care entities for the treatment of HIV. The
Company believes that it can compete favorably in this market since it has an
already established IPA model network upon which to expand and extensive
expertise in HIV treatment and research.
Significant Customers
Three Clinical Treatment Facilities had contracts with entities controlled
by officers and directors of the Company, until the sale of two of the entities
to CSI on January 1, 1996 and the sale on September 30th to the Management
Service Organization created by CSI on September 30, 1996. These entities were
William M. Reiter, M.D., PA, a Professional Association, and Paul Cimoch, M.D.,
PC, a Professional Corporation. Revenues derived directly or indirectly through
these professional associations amounted to $2,717,000, and $4,379,000 or 37%
and 47% respectively, of revenues from continuing operations for fiscal years
1996 and 1995.
Employees
As of December 31, 1997, the Company had approximately 58 employees,
including 6 executive officers, 18 office and administrative personnel, and 34
field office personnel. The Company maintains personal liability and malpractice
insurance which covers all employees.
The Company considers its employee relations to be good and is not a party
to any collective bargaining agreement.
Insurance
The Company maintains malpractice insurance with coverage of up to
$1,000,000 (which is in addition to the medical malpractice insurance coverage
maintained by the physicians who practice at the Company's facilities).
Management of the Company believes such coverage is adequate.
<PAGE>
ITEM 2. PROPERTIES
The Company is obligated pursuant to lease agreements for the following
offices:
Annual
Square Lease Expiration
Feet Payment Date
------- ----------- -----------
Corporate Office- Ft. Lauderdale, FL 7,044 $118,614 (1) 2001
Fort Lauderdale - Medical Office 5,500 $ 59,139 (2) 2002
Irvine, CA 4,550 $133,966 (3) 2002
Miami, FL 4,255 $ 88,568 2000
Chicago, IL 3,787 $113,494 (4) 2002
Los Angeles, CA 2,400 $ 26,208 (5) 1998
1) The Corporate office moved to a new location on August 1, 1997.
2) The Fort Lauderdale Medical office moved to a new location effective May 1,
1997.
3) Increases by approximately $4,000 per year.
4) The Irvine, CA medical office renewed its lease for an additional five
years.
5) The Los Angeles, CA medical office became an affiliate on October 28, 1996.
In addition to the lease amounts, the Company pays additional amounts for
operating expenses, taxes and parking.
ITEM 3. LEGAL PROCEEDINGS
In early 1993, the Securities and Exchange Commission ("SEC") advised the
Company that it had commenced a formal investigation of potential securities law
violations in connection with certain trading activities in the Company's
securities and in April 1993 requested certain information from the Company in
connection with that investigation. The Company has complied with this request.
In December 1994, the SEC asked that William Reiter, MD, David Kirchenbaum and
Susanne Loarie produce certain information in connection with the investigation.
Dr. Reiter, Mr. Kirchenbaum and Ms. Loarie have complied with these requests. In
January, 1995, attorneys for the SEC took sworn statements from Dr. Reiter, Mr.
Kirchenbaum and Ms. Loarie. Since said statements were taken, the SEC has not
made any further requests for information.
The Company has been sued by various vendors and landlords as a result of
its inability to achieve enough revenue from its ongoing operations to produce
the necessary cash flow to both maintain its current operations and its past due
payables. The Company has been able to settle many of these suits by entering
into settlement agreements which provide for a stipulated payment schedule and
the entry of a final judgement in the event of a default of the agreed upon
payments. The Company has been able to honor its obligations under the
stipulated settlements.
The Company has various lawsuits pending where a settlement has not been
reached or where the Company believes it has a good faith defense. The Company
believes that the resolution of these lawsuits will not have a significant
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Prior to January 9, 1998, the Company's common stock, par value $.02 per
share common stock, was traded on the American Stock Exchange ("AMEX") under the
symbol "HPI". The Company's Common Stock was suspended from trading on the AMEX
from February 17, 1995, to September 29, 1995 and during such period was traded
on the over-the-counter market. From September 29, 1995 through January 9th,
1998 the Company's common stock was traded on AMEX, however, during this period
the Company was still unable to fully satisfy all of the financial guidelines
for listing on the AMEX and after notice to the Company, a delisting procedure
was implemented by AMEX. Although the Company contested the delisting efforts by
AMEX, ultimately on January 1, 1998 the Company received final notice from AMEX
that its common stock would be delisted from AMEX effective on January 9, 1998.
On January 9, 1998, the company's common stock commenced trading on the
NASDAQ bulletin board and the Company intends to apply for trading on NASDAQ'S
small cap exchange as soon as it is able to meet the necessary qualifications.
The Company's B Warrants which were exercisable until December 17, 1997 at
$5.17 per share, were deleted from NASDAQ as of March 15, 1995 and have now
expired.
The following table sets forth the range of high and low closing sales or
high bid and high asked prices for the Company's common stock and B Warrants on
the respective Exchanges as reported for the periods indicated. As of December
31, 1997 there were approximately 711 holders of record of the Company's common
stock.
The Company has not paid any cash dividends on its common stock. For the
foreseeable future, it is anticipated that any earnings that may be generated
from the Company's operations will be used to finance the growth of the Company
and that cash dividends will not be paid to holders of common stock.
Common Stock B Warrants
Fiscal Year High Low High Low
- ----------- ---- --- ---- ---
1995
1st Quarter............. 7 1/2 3 1/8 1 1/4 5/8
2nd Quarter............. 4 3/8 5/8 1 1/4 1 5/16
3rd Quarter............. 6 1/4 30/32
4th Quarter............. 7 1/2 2 1/2
1996
1st Quarter............. 5 1 7/8
2nd Quarter............. 5 1 7/8
3rd Quarter............. 5 1/4 1 14/16
4th Quarter............. 4 1/4 2 9/16
1997
1st Quarter............. 3 3/8 1 3/8
2nd Quarter............. 2 1/4 7/8
3rd Quarter............. 1 11/12 1 1/4
4th Quarter............. 1 7/16 1/2
1998
October 1-December 31, 1997 1 3/16 1/2
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
Fiscal Year Ended
September 30,
---------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $ 7,493 $ 7,339 $ 9,390 $ 7,802 $ 7,994
Loss from continuing
operations (8,381) (2,960) (1,097) (9,092) (2,571)
(Loss) from
discontinued operations -- -- -- -- (1,093)
Net (loss) (8,381) (2,960) (1,097) (9,092) (3,664)
Net (loss) per share (1):
From continuing
operations ( 1.47) (.96) (.52) (4.86) (1.72)
From discontinued
operations -- -- -- -- (.73)
Net (loss) per share ( 1.47) (.96) (.52) (4.86)
As of September 30,
-----------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Data Sheet:
Working capital (deficit) $ (3,441) $ (1,673) $ 298 $ (921) $ (28)
Total assets 6,620 12,242 9,634 10,438 16,243
Long term debt, including
capitalized lease
obligations (less current portion) 1,658 1,519 4,365 4,119 1,489
Stockholders' equity(deficit) (1,526) 5,307 1,030 2,146 10,941
Book value per share (.21) 1.17 .47 1.16 7.31
</TABLE>
NOTE: Fiscals 1997 and 1994 include a $3,934,000 and a $4,000,000 write down of
the excess cost over the net assets acquired and in fiscal 1994 a
$1,000,000 provision for a note discount.
(1) Based upon the weighted average number of shares of common stock
outstanding, including common equivalent shares (stock options and
warrants), if dilutive.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND AND BUSINESS PLAN DEVELOPMENT
CSI currently owns and operates five medical clinic and research sites
located in Florida (Fort Lauderdale, Miami Beach), California (Irvine, Los
Angeles) and Illinois (Chicago). The Company had 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 Los Angeles, California. The purchases of the Fort
Lauderdale, Miami and Chicago practices have substituted the fees charged on
direct expenses, and network participation fees for patient revenues. Management
believes that by owning these practices not only will the Company increase its
revenues, but the Company will be able to better control the operations of the
medical practices. Additional physician practices located in Florida, Illinois,
California, Kansas, Oklahoma, Virginia, Texas, Pennsylvania and New York are
affiliated with the CSI network and utilize CSI services to varying degrees.
The Company's business objective is to continue to build revenue from
clinical care treatment through both the internal expansion of its existing
patient base at all currently operating CSI Clinical Treatment Facilities and by
increasing its number of facilities through the acquisition of already existing
practices. The Company has targeted for acquisition medical practices that are
operating with the same fundamental treatment strategies to CSI's treatment
strategies Management believes that the expansion of its clinical practice
network will both increase its revenue base and increase the number of patients
eligible to participate in Clinical Drug Trials.
The Company's clinical research division has recently signed Clinical
Research Agreements with Dupont, Merck and Glaxo Wellcome and has also
been increasing the number of its patients participating in existing clinical
research trials. The expansion of the amount of patients participating in
ongoing and additional clinical research trials will allow the Company to
provide more comprehensive services to these sites, thereby increasing the
revenue earned from each site.
The 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 be able to 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 Company has signed a letter of intent with a major managed care
provider that owns and operates both primary care and hospital operations. Under
the terms of the letter of intent, the Company has been asked to propose
standardized protocols for the treatment and care for the HIV/AIDS patients
utilizing these facilities. In the event that the Company closes the
transactions contemplated by the letter of intent, the proposed strategic
alliance will increase the Company's revenues through the rendition of
additional services and improved economies of scale.
<PAGE>
The Company continues to focus further on the implementation of its
business plan by, purchases of established practices, establishing new strategic
alliances, either by purchase or other affiliation, obtaining new clinical
trials contracts, contracting for the sale of its historical outcomes data while
also attempting to locate additional sources of cash. The infrastructure
continues to be developed to service a greater number of facilities.
The Company is still utilizing cash from operations and will require
additional sources of cash to continue to implement its business plan. These
sources of cash include the cash received from new clinical trials contracts,
cash from anticipated increase in operating activities, and the additional cash
to be received from certain strategic alliance contracts. In addition, the
Company has received cash from the issuance of convertible debt instruments.
No assurance can be made that sufficient additional sources of cash will be
available on terms reasonably acceptable to the Company. The Company can give no
assurances that future revenues from the operations discussed in Item 1,
"Organization and Operation" above will be consistent with historical revenues
or of the magnitude of additional revenues to be expected from the
implementation of the new CSI programs.
RESULTS OF OPERATIONS
The Company's facilities revenues are derived from rendition of medical
services (where allowed by State Law) practice management services provided
directly or from providing diagnostic laboratory, in-office infusion care and
oral pharmaceuticals to the patients of the medical professional associations
under contract with CSI. Home infusion revenues and out patient infusion care
results from services provided to patients of the professional medical
associations, primarily through sub-contracts with home infusion companies. In
addition, the Company earns revenues from performing research studies for
pharmaceutical and biotechnology companies and from the sale of its historical
outcomes data.
Year Ended September 30,
1997 1996 1995
---------- ---------- ----------
Total facilities revenues $7,196,000 $5,974,000 $7,435,000
Home health 135,000 935,000 1,209,000
Other revenue 162,000 430,000 746,000
---------- ---------- ----------
$7,493,000 $7,339,000 $9,390,000
========== ========== ==========
Total facilities revenues increased by $1,222,000, Home Health revenue
decreased by $800,000 and other revenues decreased by $268,000 in fiscal 1997 as
compared to fiscal 1996. Significant factors causing the increase in total
facilities revenues were due in part to an increase in infusion, lab and
research revenues of $550,000, $350,000, and $422,000 offset by a decrease in
network participation revenue. The decrease in total facilities revenue of
$1,461,000 in fiscal 1996 as compared to fiscal 1995 was due in part to
facilities whose contracts were not renewed, which provided
revenues of $1,928,000, a decrease in network participation fees and facilities
management revenue of $63,000 and $359,000 respectively, due to purchases of
physician practices, offset by patient revenues of $379,000, a decrease in
research revenue and lab revenue of $105,000 and $34,000 respectively, a
decrease in pharmaceutical revenue of $293,000, due to facilities no longer
dispensing oral pharmaceuticals and an increase in infusion revenue of $942,000.
The decrease in home health revenue of $800,000 is primarily due to the shifting
of service locations to the physician's office. The decrease in home health
revenue of $274,0000 for fiscal 1996 was primarily due to the cyclical nature of
the services required to care for these patients in an integrated health care
setting and the shifting of service locations to the physician's office. The
decrease in other revenue of $268,000 and $316,000 for fiscal 1997 and 1996 is
due to the conclusion of certain contracts prior to the initiation of new
contracts.
<PAGE>
The gain on the sale of securities in fiscal year 1996 is due to the
Company exercising warrants previously issued to the Company to purchase 22,191
shares of stock in a former subsidiary of the Company and the exchange of the
shares to 9,735 shares of unregistered stock in a publicly traded company. The
Company sold its interest in 8,705 shares of the publicly traded company to an
unrelated party for $145,000.
Interest and other income decreased to $ 9,000 for fiscal 1997 as compared
to fiscal 1996 of $59,000, which decreased from fiscal 1995 of $219,000, as a
result of the decrease in the note receivable from the sale of the discontinued
operations.
Direct service expense as a percentage of operating revenues was 55% for
fiscal 1997 the same as fiscal 1996. Direct expenses in 1995 were 44% of
revenues. Direct expenses as a percentage of revenues increased in 1996 compared
to 1995 and is primarily due to the purchase of physician practices which
increased the Company's salary cost. This was offset by a decrease in Home
Infusion and by facilities no longer dispensing oral pharmaceuticals.
Selling, general and administrative expenses increased by $770,000 (12%) to
$7,010,000 for fiscal 1997 as compared to the previous fiscal year. This
increase relates primarily to expenses incurred with the issuing of securities
as additional consideration in connection with the conversion of a convertible
loan and the increase in bad debt provisions which were offset by a decrease in
wages. Selling, general and administrative expenses increased by $376,000 (6%)
to $6,240,000 for fiscal 1996 as compared to the previous fiscal year. This
increase primarily relates to an increase in the use of consulting and
professional fees offset by a decrease in wages.
Prior to its acquisition of certain physician practices, the Company has
entered into contractual relationships with professional medical associations
for utilization of its facilities and in connection therewith, made cash
advances for the professional association to meet their cash flow requirements.
The Company recorded reserves related to advances due from the professional
associations with which CSI has contracted, based upon the excess of the amounts
due from the professional associations above the collateral, primarily the
receivables of these professional associations and certain other collateral,
even though such advances are expected to be collected from future operations.
The recovery in PA physician association reserves of $765,000 in fiscal year
1996 principally resulted from an increase in collateralization of the
receivables provided by one of the former CSI shareholders who is now a director
of the Company and from the collection of the advance and upon the sale of the
Chicago practice to the Company. The remaining recovery was due to the
liquidation of the advance made by the Company to the Professional Association
owed by the Chairman of the Company, upon the sale of the Florida practice to
the Company. The reserve balance is reviewed by the Company on a quarterly
basis. Any increases or decrease to such balances by the Company could
materially impact reporting results. During the 1995 fiscal year, the Company
recorded a $20,000 reserve relating to these advances.
<PAGE>
Interest decreased to $466,000 in fiscal 1997, as compared to $518,000 in
fiscal 1996. Interest was $575,000 in fiscal 1995. The decrease in fiscal 1997
was due primarily to a decrease in interest from the factors as new arrangements
were negotiated with our factors. The decrease in fiscal 1996 compared to fiscal
1995 was primarily related to the termination on February 21, 1996 of the
obligation due to the former CSI shareholders, due to the conversion of
$3,000,000 of the obligation due to the former CSI shareholders to stock.
Certain litigation matters, including an FDA inquiry and an SEC
investigation required the Company to incur litigation costs of $379,000 in 1994
in connection with these matters. The Company was not required to incur
additional expenses in connection with these matters during fiscal 1997, 1996
and fiscal 1995. The litigation cost was $75,000 for 1996 and $62,000, for 1995.
The Company incurred research and development expenses of $362,000 in 1997,
$403,000 in 1996 and $20,000 in 1995. The decrease in fiscal 1997 was due
primarily to the decrease in wages caused by the restructuring of the research
department. The increase in 1996 relates primarily to costs associated with the
Company's efforts in developing its Immune Reconstitution Cell-Transfer Therapy
for late stage AIDS patients.
In fiscal 1997, the Company recorded a $3,934,000 write down of goodwill,
an expense of $318,000 with the issuing of securities as additional
consideration in connection with the conversion of a convertible loan and a bad
debt provision of $938,000. These were the primary reasons for the increase in
the net loss of $5,421,000 as compared to fiscal 1996. The write down of
goodwill was based upon management's belief that without an infusion of cash,
impairment to the asset may be other than temporary. The Company reported a net
loss for fiscal 1997, 1996 and 1995 of $8,381,000, $2,969,000 and $1,097,000
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had stockholders' deficit of
$1,526,000 and a working capital deficit of $3,441,000 as compared to
stockholders' equity of $5,307,000 and working capital deficit of $1,673,000 at
September 30, 1996.
The Company used cash in its operating activities of approximately
($1,221,000), ($2,315,000) and ($1,262,000), respectively, for fiscal years
1997, 1996 and 1995. The decrease in the working capital was primarily a result
of a decrease in accounts receivable and an increase in accounts payable and
accrued expenses as a result of the Company being unable to pay for goods and
services in the normal course of operations, and securities issued for services.
No cash was provided from investing activities in 1997, however in 1996 and 1995
investing activities provided cash as a result of payments of notes receivable,
including $369,000 and $830,000 from a discounting of the note receivable with
Premier in 1996 and 1995, respectively. In fiscal 1997, financing activities
provided cash from convertible loans and proceeds of a term loan as discussed
below. No cash was provided from the sale of common stock for fiscal 1997. In
fiscal 1996, financing activities provided cash from the sale of common stock,
and the proceeds of two loans discussed below, offset by the payment of an
obligation to the New York Attorney General. 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 approximately $1,100,000 was available for
<PAGE>
borrowing at December 31, 1997, and $1,400,000 has been drawn at December 31,
1997. Fees charged by the factor for factoring was amended in June, 1996 from an
initial 1% of all eligible receivables to an initial 1% of eligible receivables
up to $5,000,000 a year. The fee then progressively decreases to .75% for
eligible receivables in excess of $10,000,000 a year. Funds are then advanced by
the factor at 2% over prime. In fiscal year 1996 the Company sold 500,000
shares of its post-split stock and received $2,000,000 in proceeds under
Regulation S to a group of foreign investors. In fiscal year 1995, the Company
did not sell any common stock or receive any funds related to the exercise of
common stock equivalents. The present market price of the Company's common stock
is at or below the conversion price of many of its existing common stock
equivalents and accordingly, unless the Company's market price per share
materially increases, future conversions are not anticipated. The improvement in
1995 principally resulted from the decreased net loss. In 1995 the increase in
accounts receivable was primarily due to slower collections on increased
billings and amounts due from clinical trials and other revenues. Accounts
payable and accrued expenses increased as a result of the Company being unable
to pay for goods and services in the normal course of operations offset by the
Company repaying vendors out of the funds received from discounting the note
receivable due from Premier Medical Services. Investing activities provided cash
in 1995 principally as a result of payments of notes receivable, including
$830,000 from a discounting of the note receivable with Premier in 1995.
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 revenues which include several research studies that the
Company has recently received. The research studies include the Immune Response
Corporation's HIV-1 Immunogen trial, Bristol-Myers Squibb's two Lobucovair
trials and Dupont Merck's DMP-266.
The Company anticipates that cash will continue to be used by its operating
activities during fiscal 1998, a portion of which will be funded by the
factoring arrangement.
From October 1996 to August 1997, the Company received $1,171,000 in cash
proceeds from $1,351,000 in convertible loans less original issue discount of
$180,000. Of these loans $925,000 bear interest at 5% and $426,000 at 7%
interest. Furthermore, $551,000 of the loans mature between April to August 1999
and $800,000 mature between August to November 2001. The loans are convertible
at 70% of the fair value of the stock on the day preceding the conversion. The
Company also received a short term loan of $200,000, bearing interest at prime
plus 4% which matured in September 1997, but remains unpaid as of January 8,
1998. Negotiations are being made to extend the due date of this loan.
During October and November 1997, the Company received proceeds of $300,000
in convertible loans in a Regulation S transaction. Of these loans, $250,000
bears interest at 5% and $50,000 was at 8% interest. The loans will mature in
October and November 1999. In connection with these loans, the Company issued
warrants to acquire 100,000 shares of common stock exercisable at $.50 per share
through October 2002 and 25,000 shares of common stock exercisable at $1.00 per
share through November 2002.
In order to continue as a going concern in 1997, the Company must generate
cash flow from operations, continue the informal arrangement with the Company's
factor and obtain additional sources of cash to ultimately achieve profitable
operations. The Company's plans for raising additional sources of cash primarily
rely on (1) obtaining a strategic partner who will provide capital to the
Company while also offering certain operational opportunities and/or (2)
obtaining a investment partner to further develop certain technology owned by
the Company. The Company also intends to down size operations, thereby reducing
costs while attempting to increase market share for the existing clinics, until
operations can produce positive cash flow. While all these sources of capital
are being pursued, the Company intends to continue reducing costs, work with the
vendors to obtain extended credit terms and increasing revenues at existing
facilities. No assurances can be made that the Company can obtain additional
<PAGE>
sources of capital or that operations can produce positive cash flow. (See
Report of Independent Certified Public Accountants regarding the Company's
ability to continue as a going concern).
Future Accounting Pronouncements
Statement of Financial accounting Standards (SFAS) No. 128, "Earnings per
Share," issued in February 1997, replaces the current methodology for
calculating and presenting earnings per share. Under SFAS No. 128, primary
earnings per share will be replaced with a presentation of basic earnings per
share and fully diluted earnings per share will be replaced with diluted
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shares outstanding. Diluted earnings per
share is computed similarly to fully diluted earnings per share in accordance
with APB Opinion No. 15. The Statement will be effective for financial
statements issued by the Company after December 15, 1997. The impact of SFAS No.
128 is not expected to be material.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displaced with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this report beginning on Page F-1.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is submitted concerning the directors, executive
officers and significant employees of the Company based upon information
received by the Company from such persons:
NAME AGE POSITION
- ---- --- --------
William M. Reiter 42 Chairman of the Board
Paul Merrigan 62 Chief Executive Officer
And President and Director
Bradford J. Beilly 43 General Counsel
Gary M. Cedeno 58 Chief Financial Officer
Paul J. Cimoch 41 Director
Floyd Kephardt 55 Director
Fred Roa 61 Director
Dr. Reiter was Chairman of the Board of Directors, President and Chief
Executive Officer of the Company between August 1992 and September 1997. Dr.
Reiter has also been President, Chief Executive Officer and Director of Research
of CSI since 1986. On September 1997, Dr. Reiter voluntarily resigned as CEO and
President. Dr. Reiter attended the Johns Hopkins University and the Albany
Medical College of Union University and received his M.D. in 1980. He completed
his residency in Internal Medicine at the University of Miami and was Board
Certified in 1983. He was elected a Fellow of the American College of Physicians
in 1988.
Mr. Merrigan has served as CEO and President of the Company since September
6, 1997. He has more than twenty-five years of successful senior management
experience in the medical, pharmaceutical, technical and chemical industry. Mr.
Merrigan was with Warner Lambert Corporation for many years in positions of
successive responsibility including new drug application development, marketing
and division management. Mr. Merrigan has extensive experience in corporate
turnaround and international marketing
Mr. Beilly has been outside General Counsel of the Company since July 1993,
and in October 1993 he was elected Vice President--General Counsel of the
Company. As of October 1, 1997 Mr. Beilly resigned his position as a
Vice-President of the Company, however, he has agreed to remain as the Company's
General Counsel. Prior to serving as the Company's General Counsel, Mr. Beilly
was a partner in the law firm Miller, Beilly and Pozzuoli, and is now a partner
in Beilly & Pozzuoli. Mr. Beilly received his B.A. from the State University of
New York at Albany in 1976 and his J.D. from Nova University in 1980.
<PAGE>
Mr. Cedeno has been the Principal Accounting Officer since March 1997 and
was appointed the Chief Financial Officer of the Company in October, 1997. He
brings over thirty years of experience in auditing, financial and business
operations. He previously held the position of Chief Financial Officer of
Caribbean Satellite Network, a television broadcasting station. Mr. Cedeno
received his education at Fatima College, Trinidad W.I. and has a diploma from
the Association of Certified and Corporate Accountants (ACCA) London, England.
Dr. Cimoch has been a Director of the Company since April 1996. Dr. Cimoch
is also the Company's Director of Medical Affairs. He co-founded CSI with Dr.
Reiter in 1986. He attended the University of Texas Medical Branch in Galveston,
where he received his medical degree in 1983, completed his residency in
Internal Medicine at the University of Miami and was Board certified in 1986. He
was elected a Fellow of the American College of Physicians in 1991. Dr. Cimoch
is a past President of the Physicians' Association for AIDS Care.
Mr. Roa has been a Director of the Company since February 1993. Mr. Roa has
been the managing director of Telesis Corp. (a merger and acquisitions
consulting firm specializing in the healthcare field) since 1980. Mr. Roa is a
licensed public accountant and is affiliated with several professional
organizations, including the New York State Association of Health Care
Providers.
Mr. Kephardt is chairman of Solutions Corporation of America, Applied
Health Technologies and Insight Marketing Corporation which provide corporate
strategy, electronic marketing and technological consulting to corporations and
government. Mr. Kephart was chairman and CEO of McDowell Corp. (Amex) and
Southern States Corporation. In 1985, Mr. Kephart created Sports News Network
and acted as its chairman until 1988. Mr. Kephart has provided management and
marketing consulting to many major corporations including Gulf & Western
(Paramount), General Motors, Chrysler, Proctor & Gamble, Sega, ABC and NBC.
All directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors are elected and qualified.
Executive officers hold office until their successors are elected and qualified,
subject to earlier removal by the Board of Directors.
No family relationship exists between any director or executive officer and
any other director or executive officer of the Company. However, Marvin Reiter,
CSI'S Executive Vice President for Clinic Operations is the uncle of Dr. William
Reiter.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Cash Compensation
The following table shows the cash compensation paid to, or accrued for,
the Company's Chief Executive Officer and the Company's executive officers who
are serving as executive officers at September 30, 1997 and who received more
than $100,000 during the fiscal year ended September 30, 1997:
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Option All Other
Name and Principal Position FYE Salary (1) Bonus Shares Compensation
- --------------------------- --- ---------- ----- -------- ------------
<S> <C> <C> <C> <C> <C>
William M. Reiter 1997(3) $185,301 -- -- $ 57,800
Chairman of the Board 1996(2) $170,800 -- 90,000(5) --
1995 $220,500 -- -- --
Bradford J. Beilly 1997 -- -- -- $119,120(4)
General Counsel 1996 -- -- 45,000(5) $148,000(4)
1995 $ 33,200 -- 10,000(5) $106,200(4)
</TABLE>
(1) Represents all amounts earned during the fiscal year shown; although some
compensation may have been deferred and paid in the subsequent fiscal year.
(2) During Fiscal 1996, Dr. Reiter took a one time voluntary pay cut of
$67,000.
(3) During Fiscal 1997, Dr. Reiter received $58,400 in cash, $57,800 worth of
unregistered common stock of the company valued at $0.54 per share
(107,037)and has deferred $126,900 which is due and owing.
(4) Paid to Beilly and Pozzuoli, a law firm in which Mr. Beilly is a partner.
(5) These options were repriced in September 1995 to $.50 per share (along
with all other shares issued under the Company's option plan) when the
market price of the Company's Common Stock was $.25 per share. In
connection with the reverse stock split in April 1996, these options were
automatically repriced to $5.00 per share. In July 1997 the Board of
Directors repriced these options (along with all other shares issued under
the Company's option plan) to $1.00 per share.
Compensation Agreements
CSI entered into a Services Agreement, dated December 23, 1991, with AGA,
Inc. ("AGA"), for the purpose of retaining the services of Dr. William M.
Reiter, the sole shareholder of AGA, to act as the President of CSI, for a term
of five years. In consideration for such services, CSI agreed to pay AGA a fee
of $200,000 per annum, subject to annual increases, as well as to reimburse AGA
for the cost of providing Dr. Reiter with employee benefits, including health
insurance, employee benefit plans and incentive compensation plans. In
connection with Dr. Reiter becoming the Company's Chairman of the Board, the
<PAGE>
Company and AGA in October 1992 agreed that the Company would pay Dr. Reiter a
salary of $150,000 per annum and that CSI would pay AGA a fee of $50,000 per
annum in lieu of the foregoing arrangement, with the new compensation
arrangement including a cost of living adjustment. Effective October 1, 1993,
the AGA agreement was terminated and Dr. Reiter and the Company executed a
three-year agreement with similar terms. The new agreement also provided Dr.
Reiter with a bonus for each fiscal year of the Company during the term of this
agreement equal to 5% of pre-tax profits for each year to the extent such
pre-tax profits exceed the greater of $1,500,000 or the highest pre-tax profits
earned during any preceding year for which Dr. Reiter is entitled to a bonus.
For fiscal 1996, Dr. Reiter agreed to a one time 30% voluntary pay cut, while
other senior executives took similar pay cuts in fiscal 1997. The Agreement
expired on October 1, 1996 and Dr. Reiter has elected to defer formalization of
a new agreement until additional outside members are elected to serve on the
Board of Directors and a compensation committee is formed.
The Company entered into an employment agreement with Mr. Beilly, effective
as of September 1, 1993, pursuant to which Mr. Beilly serves as Vice
President--General Counsel of the Company. The employment agreement was for a
three-year term at an initial annual base salary of $120,000 adjusted annually
for cost of living increases. The annual base salary was increased to $132,800
on September 1, 1994. In January 1995, as part of the Company's internal
restructuring, Mr. Beilly's compensation was changed to an Independent
Contractor relationship under which Beilly & Pozzuoli was paid $11,800 per month
for providing Mr. Beilly's legal services. In October 1996, effective for fiscal
1997 only, the monthly compensation to Beilly & Pozzuoli was reduced to $8,260
per month. In addition, as part of his original employment agreement, Mr. Beilly
received warrants to purchase 5,000 post split shares of the Company's common
stock at $1.375 per share, which since have been modified to $1.00 per share,
along with the repricing of all of Mr. Beilly's stock options. Mr. Beilly
received additional options to purchase 45,000 shares of the Company's common
stock which has been repriced to $1.00 per share in July 1997. In addition, in
February 1996, the Board of Directors approved the issuance of 10,000 (post-
split) shares of the Company's common stock which were issued to Mr. Beilly to
compensate him for additional significant responsibilities taken on beyond that
of General Counsel and Secretary.
The Company entered into an employment agreement with Mr. Merrigan,
effective as of September 2, 1997, pursuant to which Mr. Merrigan serves as
Chief Executive Officer and President of the Company for the three-year term
ending September 2, 2000. The employment agreement contains an initial annual
base salary of $275,000, plus an incentive bonus equal to 5% of earnings before
interest and taxes (EBIT), subject to certain limitations. Additionally,
pursuant to the employment agreement, the Company granted Mr. Merrigan options
to purchase in an amount of 750,000 shares. The stock options vested as follows:
(i) 50% upon execution of Mr. Merrigan's employment agreement; and (ii) 2.08%
per month for each month of service thereafter.
The Company currently compensates outside directors for their services in
such capacity at an annual fee of $6,000, paid on a quarterly basis in cash or
at the director's option, in shares of the Company's common stock. During fiscal
1996, Fred Roa received 3,000 post-split shares of the Company's common stock in
lieu of $7,500 which was owed to him as director's fees. In addition, Messrs.
Roa and Marsh were each issued 2,500 post-split unregistered shares of the
Company's common stock in consideration for them agreeing to serve without
directors and officers liability insurance, the absence of which saves the
Company approximately $110,000 per year.
Stock Option Plans
1991 Stock Option Plan. In December 1991, the Company adopted its 1991
Stock Option Plan ("1991 Plan") providing for an aggregate of 600,000 shares of
common stock to be reserved for issuance thereunder. The Plan is administered by
the Board of Directors of the Company and is maintained for the purpose of
encouraging employees, directors and officers of the Company to participate in
the growth and development of the Company. The Board of Directors determines, in
accordance with the provisions of the Plan, the number of shares to be optioned,
<PAGE>
the option price and any other terms in respect of such option. In no event
shall the purchase price of an option issued to an employee of the Company be
less than the fair market value of the common stock on the date of grant (or,
for persons who own more than 10% of the Company's outstanding voting stock, no
less than 110% of such fair market value). The aggregate fair market value
(determined as of the time the option is granted) of shares of common stock with
respect to which incentive stock options become exercisable for the first time
by the optionee under the Plan during any calendar year may not exceed $100,000.
No option granted under the 1991 Plan may be exercised more than five years from
the date of grant. If a participant ceases to be an employee, officer or
director of the Company (for any reason other than death, disability or
retirement at age 65), any option not previously exercised shall automatically
lapse, terminate and expire. The 1991 Plan terminates on December 22, 2001.
The following table sets forth certain information with respect to stock
options exercised during fiscal 1997 by each of the executive officers named in
the summary compensation table under "Cash Compensation" above:
Aggregate Option Exercise in the Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In The Money
Options Options (1)
------- -----------
Shares Value
Name Acquired Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William M. Reiter, M.D. -- -- 100,000 0 0 0
Paul F. Merrigan -- -- 395,000 395,000 96,000 96,000
Bradford J. Beilly -- -- 50,000 0 0 0
</TABLE>
- -----------------
(1) The fair market value of the Company's Common Stock on September 30, 1997
was $1.00 per share.
(2) Ms. Loarie resigned from the Company effective February 7, 1997.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 12, 1997 by all persons
known by the Company to be beneficial owners of more than five (5%) percent of
its Common Stock, each director and nominee director of the Company and all
officers and directors as a group.
Amount and Nature
of Beneficial Percent
Name and Address * Ownership (1) of Class
- ---------------- --------------------- --------
William M. Reiter, M.D. 1,068,330 (2)(3) 14.7%
Fred Roa 16,200 (4) **
Paul J. Cimoch, M.D. 513,987 (4)(5) 7.1%
Bradford Beilly 50,000 (6) 1.0%
Daniel S. Berger, M.D. 1,131,000 (7) 15.6%
Floyd Kephart 0 **
UFH Endowment 630,000 8.7%
Paul Merrigan 0 (7) **
All officers and directors 3,409,517 47.1%
as a group (7 persons)
- --------------------
* All addresses are care of the Company at 2601 East Oakland Park Boulevard,
3rd Floor, Fort Lauderdale, Florida 33306, except as otherwise indicated.
** Represents less than 1% of the Company's outstanding common stock.
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
(2) Includes 100,000 shares issuable under currently exercisable stock options.
(3) Excludes 370,370 shares which shall be issued to Dr. Reiter in connection
with deferred compensation and which shall be issued after the Record Date.
(4) Includes 10,000 shares issuable under currently exercisable stock options.
(5) Excludes 55,555 shares which shall be issued to Dr. Cimoch in connection
with deferred compensation and which shall be issued after the Record Date.
(6) Includes 55,000 shares issuable under currently exercisable warrants and
vested stock options.
(7) Excludes options exercisable at $.75625 per share which Mr. Merrigan shall
receive under his employment agreement equal to 10% of the outstanding
shares of the Company as of September 3, 1997.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As discussed under "Business" above, for each facility owned and prior to
the Fort Lauderdale and Miami, Florida purchase on January 1, 1996, and the
Irvine purchase on September 30, 1996, CSI contracted with a professional
corporation to utilize the facility in order to provide care to its patients. In
the case of the facilities located in Fort Lauderdale and Miami, CSI had
contracted with William M. Reiter, M.D., PA, a Professional Association, which
is owned by Dr. Reiter, the Company's Chairman of the Board and Chief Executive
Officer, although in 1996 and 1995, the only contract in effect related to the
Fort Lauderdale facilities. Revenues derived by the Company from the Fort
Lauderdale contract amounted to $321,000 for fiscal 1996 as compared to
$1,241,000 and $2,109,000 for fiscal 1995 and fiscal 1994 for both the Miami and
Fort Lauderdale facilities. The Florida medical practices were acquired for
$1,366,000. The purchase price approximated one year's net revenues from March
1995 to February 1996. The proceeds were used to pay amounts due to the Company
of $1,300,000 and the Company assumed the medical practice net amounts
receivable of $124,000. The balance of $66,000 was paid in cash. In the case of
the facility located in Irvine, CSI had contracted with Paul J. Cimoch, M.D.,
PC, a Professional Corporation, which is owned by Dr. Cimoch, a member of the
Company's Board of Directors. Revenues derived by the Company from the Irvine
contract amounted to $2,396,000 for fiscal 1996 as compared to $2,147,000 and
$2,291,000 for fiscal 1995 and fiscal 1994. The Irvine practice was purchased by
a Management Service Organization in California, which was created by the
Company for $2,309,000. The purchase price approximated one year's net revenues
from August 1995 through July 1996. The proceeds were used to pay amounts due
to the Company of $2,303,000 and the Company assumed the medical practice net
accounts receivable of $921,000. The balance of $6,000 was paid in cash.
Pursuant to the contracts with the professional associations, the Company
advances funds from time to time to the professional associations to meet their
cash requirements. As of September 30, 1996, the receivables, including advances
due to the company from William M. Reiter, M.D. and Paul Cimoch, M.D., were
fully paid from the proceeds of the sale of the practices to the Company on
January 1, 1996 and September 30, 1996, respectively, with the net proceeds
being paid to Dr. Reiter and Dr. Cimoch, respectively.
As described in Footnote 3 to the Company's Financial Statements, the
Company in December 1991 acquired CSI, of which Dr. Reiter was then a 60%
shareholder. Under the terms of that acquisition, the Company was required to
make certain payments of cash and stock to Dr. Reiter and the other former
shareholders of CSI based upon CSI's earnings (as defined in the acquisition
agreement) over the next two years. During fiscal 1993, the Company became
obligated under the terms of the foregoing acquisition to issue Dr. Reiter
384,175 shares of its common stock and to pay him $1,311,316, of which $731,316
remains owing to him as of December 31, 1993. The Company has provided a
guarantee to the former shareholders of CSI that sales of shares of the
Company's common stock issued to them in connection with the Company's
acquisition of CSI would generate certain specified minimum proceeds to them.
The Company has granted a security interest in all of the outstanding common
stock of CSI to these former shareholders in connection with these guarantees.
These guarantees included the agreement of the Company to fund any loss realized
by Dr. Reiter on any sales by him of approximately 720,000 shares that were
issued to him by the Company at a price of approximately $1.00 per share if made
within one year from the date of issuance and to pay Dr. Reiter with respect to
approximately 60,000 shares previously issued to him an amount equal to the
amount, if any, by which his net proceeds from any sales of these shares made
within the next year are less than $5.12 per share (the defined market value at
the time of the Company's acquisition of CSI). On December 5, 1994, the Company
received a notice of default from the counsel for the former CSI shareholders
together with a settlement proposal. The Board, excluding Dr. Reiter, after
<PAGE>
engaging outside legal counsel and extensive discussions, negotiated and agreed
to a final settlement offer, which was ratified and approved by the Board of
Directors. In January 1995, the Board of Directors of the Company approved a
settlement transaction with Dr. William Reiter, the Chairman and Chief Executive
Officer of the Company, and the other CSI shareholders. The settlement
transaction resulted from one actual default, two stock price guarantee
obligations which, when the related shares were sold, would likely become
defaults and the third year earn out which would require additional
consideration to be paid to CSI shareholders. Pursuant to the settlement the CSI
shareholders were issued 3,102,000 shares of common stock resulting from the
third year earn out. The Company agreed to register 1,679,000 shares previously
issued, and the Company issued to the CSI shareholders, a convertible note (the
"Convertible Note") for the cash arising from the stock price guarantees,
without selling such shares, and the cash portion of the 1995 earn out. The
$3,193,000 Convertible Note bore interest at prime and is convertible into
common stock at 70% of the market price at anytime after February 1, 1997. In
February 1996, the Company's Board of Directors approved an agreement to
immediately convert, $3,000,000 of the $3,193,000 convertible debt owed to the
former CSI shareholders into 1,200,000 (post-split) share of the Company's
common stock valued at $2.50 a share (post-split).
In September, of 1996, Dr. Reiter, the Company's Chairman of the Board and
Chief Executive Officer loaned the Company $125,000 in order for the company to
meet current commitments. In October through December approximately $96,000 of
the loan has been repaid in August 1997, he again loaned the Company $20,000
of which $4,000 was repaid by September 30, 1997 and a further $10,000 was
repaid in November 1997. Dr. Reiter also received during 1997, 370,370 shares
in satisfaction of $200,000 of deferred compensation.
The CSI Foundation, Inc. is controlled by Dr. William Reiter, Dr. Paul
Cimoch and Marvin Reiter and performs research and development activities
primarily in connection with its Immune Reconstitution Cell Transfer Therapy for
late stage AIDS patients. Previously, the Foundation did not have assets to
support the project and the Company continued to perform the research. During
fiscal years 1997, 1996 and 1995, the Company recorded expenses of $184,000,
$192,000 and $59,000, respectively, related to the Foundation. Dr. William
Reiter, Dr. Paul Cimoch and Marvin Reiter, collectively reimbursed the Company
the sums of $0 (1997), $124,000 (1996), and $136,000 (1995) respectively for
services rendered to the Foundation. All such reimbursements and contributions
to the Foundation were for ordinary charitable purposes.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Schedules
See the Index to Consolidated Financial Statements on Page F-1 hereafter,
which is incorporated herein by reference.
The following Financial Statement Schedules for the years 1996, 1995 and
1994 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts.
[All other Schedules are omitted from this report as they are inapplicable
or not required under Regulation S-X or because the required information is
set forth in the Consolidated Financial Statements or related notes.]
(a)(3) Exhibits
Exhibit
Number Exhibit Description
------ -------------------
3(a) Certificate of Incorporation (5)
3(b) By-Laws (5)
3(c) Amendment to the Certificate of Incorporation
4(a) Form of Warrant Agreement between the Warrant Agent and the Company
(including form of Class B Warrants) (1)
4(b) Form of Unit Purchase Option (1)
10(a) Settlement Agreement, dated July 16, 1990, between Edward J. Kuriansky as
claiming authority and on behalf of the State of New York, and the Company
(2)
10(b) Form of Modified Settlement, dated January 12, 1994, by and among Edward
J. Kuriansky as claiming authority and Deputy Attorney General for
Medicaid Fraud Control, Professional Care, Inc., the Company, Martin
and Harriet Weissman, Israel Cohen and Arthur I. Goldberg as executor
of the Estate of Arlene Cohen (9)
10(c) Lease Agreement dated December 21, 1984 between 125 East Bethpage
Associates and the Company, as amended (3)(4)(6)
10(d) 1982 Stock Option Plan (6)
10(e) 1991 Stock Option Plan (7)
10(g) Agreement and Plan of Merger, dated December 23, 1991, by and among Center
for Special Immunology, Inc., CSI Development Corp., William M.
Reiter, M.D., Paul Cimoch, M.D., Marvin Reiter and the Company (the
"CSI Merger Agreement")(6)
10(h) Employment Agreement dated September 18, 1992 between Susanne Loarie and
the Company (7)
10(i) Services Agreement dated December 23, 1991 between AGA, Inc. and Center
for Special Immunology, Inc. (7)
10(j) Severance Agreement dated May 14, 1992 between Martin Weissman and the
Company; Promissory Note by Martin Weissman to the Company dated June 26,
1992; Agency Agreement dated June 26, 1992 (7)
<PAGE>
10(k) Settlement Agreement dated January 11, 1994 by and among the Company,
Martin Weissman and Breslow & Walker (10)
10(l) Lease Agreement dated November 20, 1992 between I-SBC Limited Partnership
and the Company (7)
10(m) Asset Purchase Agreement dated April 15, 1993 by and among Premier
Service, Inc. and Health Professionals East, Inc., Health Professionals
West, Inc., Hematech, Inc., Insurance Medical Reporter, Inc., and
Professional Care, Inc. and related documents and agreements (10)
10(n) Employment Agreement dated October 26, 1993 between Bradford J. Beilly and
the Company (9)
10(o) Consulting Agreement dated July 19, 1993 between J.D. Ross International
and the Company and related Warrant (9)
10(p) Attorney's Retention Agreement dated July 19, 1993 between Richard
Morganstern, a Professional Corporation, and the Company and related
Warrant (9)
10(q) Form of identical Factoring Agreements between each of Paul J. Cimoch,
M.D., P.C., William M. Reiter, M.D., P.A., and Daniel S. Berger, M.D.,
Ltd., respectively, subsidiaries of CSI, and Capital Factors (9)
10(r) Modification and Supplement to Premier Asset Purchase Agreement (9)
10(s) Second Modification to CSI Merger Agreement (10)
24 Independent Certified Public Accountants' Consent
- ---------------
(1) Incorporated by reference from Professional Care, Inc.'s (predecessor to
Registrant) Registration Statement on Form S-1, File No. 33-37204.
(2) Incorporated by reference from Professional Care, Inc.'s (predecessor to
Registrant) Form 8-K, which date of report is July 6, 1990.
(3) Incorporated by reference from Professional Care, Inc.'s (predecessor to
Registrant) Form 10-K for the fiscal year ended September 30, 1990.
(4) Incorporated by reference from Professional Care, Inc.'s (predecessor to
Registrant) Form 8-K, which date of report is November 29, 1984.
(5) Incorporated by reference from Registrant's Registration Statement on Form
S-4, File No. 33-42675.
(6) Incorporated by reference from Registrant's Form 10-K for the fiscal year
ended September 30, 1991.
(7) Incorporated by reference from Registrant's Form 10-K for the fiscal year
ended September 30, 1992.
(8) Incorporated by reference from Registrant's Form 8-K, dated June 21, 1993.
(9) Incorporated by reference from Registrant's Form 10-K, for the fiscal year
ended September 30, 1994.
(10) Incorporated by reference from Registrant's Form 10-Q for the quarter
ended December 31, 1994.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEALTH PROFESSIONALS, INC.
Date: January 13, 1998 By: /s/ Paul F. Merrigan
-------------------------- ---------------------------------------
Paul F. Merrigan
President and Chief Executive Officer
Date: January 13, 1998 By: /s/ Gary M. Cedeno
-------------------------- ---------------------------------------
Gary M. Cedeno, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Date: January 13, 1998 /s/ Fred Roa
-------------------------- ---------------------------------------
Fred Roa, Director
Date: January 13, 1998 /s/ Paul F. Merrigan
-------------------------- ---------------------------------------
Paul F. Merrigan, Director
Date: January 13, 1998 /s/ William Reiter
-------------------------- ---------------------------------------
William Reiter, M.D., Director
Date: January 13, 1998 /s/ Paul J. Cimoch
-------------------------- ---------------------------------------
Paul J. Cimoch, M.D., Director
<PAGE>
Health Professionals, Inc. and Subsidiaries
Index
Report of Independent Certified Public Accountants .........................F-2
Consolidated Balance Sheets, September 30, 1997 and 1996....................F-3
Consolidated Statements of Operations,
Years Ended September 30, 1997, 1996 and 1995......................F-4
Consolidated Statements of Stockholders' Equity (Deficit),
Years Ended September 30, 1997, 1996 and 1995......................F-5
Consolidated Statements of Cash Flows,
Years Ended September 30, 1997, 1996 and 1995......................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
and Stockholders of
Health Professionals, Inc.
We have audited the accompanying consolidated balance sheets of Health
Professionals, Inc. and subsidiaries as of September 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended September 30,
1997. We have also audited the accompanying schedule of valuation and qualifying
accounts. These consolidated financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as, evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Professionals, Inc. and subsidiaries at September 30, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997 in conformity with generally accepted
accounting principles.
Also in our opinion, the schedule referred to above presents fairly, in
all material respects, the information set forth therein.
The accompanying consolidated financial statements and the schedule
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations, has negative working capital, a
deficit in stockholders' equity and has a cash deficiency from operations which
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements and schedule do not include any adjustments
that might result from the outcome of this uncertainty.
Miami, Florida BDO SEIDMAN, LLP
January 10,1998
F-2
<PAGE>
Health Professionals, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and 1996
(Note 1)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ -- $ 49,000
Accounts receivable, less allowance for doubtful
accounts of $2,461,000 and $1,981,000,
respectively (Note 6) 2,782,000 3,425,000
Inventory 63,000 108,000
Prepaid consulting fees, current portion (Note 9) 171,000 115,000
Prepaid expenses and other 31,000 46,000
------------ ------------
Total current assets 3,047,000 3,743,000
EQUIPMENT, FURNITURE AND FIXTURES AND
LEASEHOLD IMPROVEMENTS, net (Note 4) 845,000 1,338,000
PREPAID CONSULTING FEES, less current portion (Note 9) 102,000 145,000
COVENANTS NOT TO COMPETE, less accumulated amortization
of $418,000 and $131,000 (Note 3) 158,000 419,000
COSTS IN EXCESS OF NET ASSETS OF BUSINESSES
ACQUIRED, less accumulated amortization of
$136,000 and $765,000 (Note 3) 2,287,000 6,134,000
OTHER ASSETS 181,000 463,000
------------ ------------
TOTAL $ 6,620,000 $ 12,242,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 7) 4,149,000 3,725,000
Accrued salaries and payroll taxes 278,000 117,000
Factoring line of credit (Note 6) 1,312,000 1,100,000
Current portion of long-term debt (Note 6) 749,000 474,000
------------ ------------
Total current liabilities 6,488,000 5,416,000
------------ ------------
LONG-TERM DEBT, less current portion (Note 6) 1,658,000 1,519,000
------------ ------------
LITIGATION, COMMITMENTS AND SUBSEQUENT EVENTS (Notes 8 and 13)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 3, 6 and 9):
Serial preferred stock, $1 par value;
authorized 100,000 shares; issued - none -- --
Common stock, $.02 par value; authorized
25,000,000 shares; issued 7,246,000
and 4,554,000 shares 145,000 91,000
Additional paid-in capital 44,774,000 43,280,000
Less: 4,000 shares of Treasury Stock at cost (42,000) (42,000)
Deficit (46,403,000) (38,022,000)
------------ ------------
Total stockholders' equity (deficit) (1,526,000) 5,307,000
------------ ------------
TOTAL $ 6,620,000 $ 12,242,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Health Professionals, Inc. and Subsidiaries
Consolidated Statements of Operations Years Ended September 30,
1997, 1996 and 1995
(Note 1)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Operating revenues $ 7,493,000 $ 4,622,000 $ 5,011,000
Operating revenues - related
parties (Note 10) -- 2,717,000 4,379,000
Interest and other income 9,000 59,000 219,000
Gain on sale of securities -- 166,000 --
------------ ------------ ------------
7,502,000 7,564,000 9,609,000
------------ ------------ ------------
COSTS AND EXPENSES:
Direct service 4,111,000 4,053,000 4,165,000
Selling, general and administrative
(Note 8) 7,010,000 6,240,000 5,864,000
Interest 466,000 518,000 575,000
Research and development (Note 10) 362,000 403,000 20,000
Provision for impairment of costs in
excess of net assets of businesses acquired (Note 3) 3,934,000 -- --
Provision (recovery) for loss on advances
and other professional association
reserves to related parties (Note 3) -- (765,000) 20,000
Costs incurred in connection with litigation (Note 8) 75,000 62,000
------------ ------------ ------------
15,883,000 10,524,000 10,706,000
------------ ------------ ------------
NET LOSS $ (8,381,000) $ (2,960,000) $ (1,097,000)
============ ============ ============
NET LOSS PER SHARE $ (1.47) $ (.96) $ (.52)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,683,000 3,092,000 2,089,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Health Professionals, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended September 30, 1997, 1996 and 1995
(Notes 1 and 9)
<TABLE>
<CAPTION>
Common Stock Additional
Treasury Paid-in
Shares Amount Stock Capital Deficit Total
------ ------ -------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at
September 30, 1994 1,845,000 $37,000 $(42,000) $36,016,000 $(33,965,000) $2,046,000
Earn Out Shares issued in
lieu of cash (Note 3) 310,000 6,000 - (6,000) - -
Shares Issued for Services 34,000 1,000 - 80,000 - 81,000
Net Loss - - - - (1,097,000) (1,097,000)
Balances at
September 30, 1995 2,189,000 44,000 (42,000) 36,090,000 (35,062,000) 1,030,000
Sale of Common Stock (Note 9) 500,000 10,000 - 1,990,000 - 2,000,000
Conversion of debt owed to
former CSI shareholders
to equity (Note 9) 1,200,000 24,000 - 2,976,000 - 3,000,000
Acquisition of Chicago
practice (Note 3) 246,000 5,000 - 1,078,000 - 1,083,000
Stock warrants issued
at a discount (Note 9) - - - 42,000 - 42,000
Shares issued for services (Note 9) 419,000 8,000 - 1,104,000 - 1,112,000
Net Loss - - - - (2,960,000) (2,960,000)
Balances at
September 30, 1996 4,554,000 91,000 (42,000) 43,280,000 (38,022,000) 5,307,000
Acquisition of Los Angeles
practice (Note 3) 168,000 3,000 - 379,000 - 382,000
Shares issued for services (Note 9) 300,000 6,000 - 213,000 - 219,000
Conversion of debt owed on
debentures (Note 9) 630,000 13,000 - 775,000 - 788,000
Conversion of liabilities to
CSI shareholders to equity (Note 9) 463,000 9,000 - 241,000 - 250,000
Final determination
of Chicago practice acquisition
(Note 9) 1,131,000 23,000 - (23,000) - -
Amendment reallocating price for Chicago
Practice acquisition (Note 9) - - - (297,000) - (297,000)
Warrants issued in connection
with convertible loans (Note 9) - - - 122,000 - 122,000
Options issued to employees - - - 84,000 - 84,000
Net Loss - - - - (8,381,000) (8,381,000)
------ ------ ------- ------ ------ ------
Balances at
September 30,1997 7,246,000 $145,000 $(42,000) $44,774,000 $(46,403,000) $(1,526,000)
========= ======== ========= =========== =============== ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Health Professionals, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended September 30, 1997, 1996 and 1995
(Notes 1, 9 and 11)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(8,381,000) $(2,960,000) $(1,097,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 550,000 565,000 504,000
Amortization of goodwill and covenants 634,000 309,000 149,000
Provision (recovery) for bad debts 938,000 (765,000) 320,000
Provision for impairment of costs
in excess of net assets acquired 3,934,000 -- --
Securities issued for services 47,000 852,000 81,000
Options issued to employees 84,000 -- --
Securities issued as additional consideration in connection
with the conversion of debt 318,000 -- --
(Decrease) increase of lease obligation reserves (458,000) (106,000) 141,000
Loss on Disposal of Fixed Assets 72,000 -- --
Change in assets and liabilities, net of effects of acquisitions:
(Increase) in accounts receivable (295,000) (730,000) (1,884,000)
Decrease (increase) in inventory 45,000 (2,000) 174,000
Decrease (increase) in prepaid expenses and
other 152,000 (31,000) 97,000
Decrease (increase) in other assets 282,000 (195,000) (11,000)
Increase in accounts payable
and accrued expenses 446,000 859,000 218,000
Increase (decrease) in accrued salaries
and payroll taxes 411,000 (111,000) 46,000
----------- ----------- -----------
Net cash (used in) operating activities (1,221,000) (2,315,000) (1,262,000)
----------- ----------- -----------
INVESTING ACTIVITIES:
Collection of notes receivable -- 683,000 1,404,000
Cash paid for acquisition of medical practices -- (72,000) --
Capital expenditures, net (109,000) (444,000) (135,000)
----------- ----------- -----------
Net cash (used in) provided by investing activities (109,000) 167,000 1,269,000
----------- ----------- -----------
FINANCING ACTIVITIES:
Repayment of long-term debt and
current maturities (500,000) (887,000) (645,000)
Proceeds from long-term debt 1,569,000 682,000 --
Proceeds from sales of common stock -- 2,000,000 --
Cash received from Factor, net 212,000 382,000 618,000
----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,281,000 2,177,000 (27,000)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (49,000) 29,000 (20,000)
CASH, BEGINNING OF PERIOD 49,000 20,000 40,000
----------- ----------- -----------
CASH, END OF PERIOD $ 0 $ 49,000 $ 20,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
1. GOING CONCERN
The Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred losses of
$8,381,000, $2,960,000 and $1,097,000 for each of the three years in the period
ended September 30, 1997, respectively. In addition, the Company used $1,221,000
of cash for its fiscal 1997 operations, has negative working capital of
$3,441,000 and has a deficit in stockholders' equity of $1,526,000. In order to
remain a going concern the Company must obtain additional sources of cash and
ultimately achieve profitable operations. The Company's plans for raising
additional sources of cash primarily rely on (1) obtaining a strategic partner
who will provide capital to the Company while also offering certain operational
opportunities; and/or, (2) obtaining an investment partner to further develop
certain technology owned by the Company. While additional sources of cash are
being pursued, the Company intends to further down size operations, thereby
reducing costs while attempting to increase market share for the existing
clinics until operations can produce positive cash flow. No assurances can be
made that the Company can obtain additional sources of cash or that operations
can produce a positive cash flow.
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems by raising additional cash and by achieving profitable
operations as set forth above. Working capital limitations continue to impinge
on day-to-day operations, thus, contributing to continued operating losses. The
continued support of the Company's creditors will be required, although this is
not assured.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
2. SUMMARY OF ACCOUNTING POLICIES
Description of Business - Center For Special Immunology (CSI), a subsidiary owns
and operates an integrated healthcare delivery and clinical research system that
includes a multistate network of primary care and clinical facilities
specializing in immune system disorders, consisting primarily of HIV, AIDS and
Chronic Fatigue Immune Dysfunction Syndrome (CFIDS). This network also conducts
multi-center trials in cooperation with biotechnology and pharmaceutical
companies. CSI derives the major portion of its revenues from medical
professional corporations either which CSI owns or which contract with CSI to
utilize its facilities and utilize CSI's ancillary services in order for the
professional corporation to provide care to its patients.
Concentration of Credit Risk - The Company grants credit, including cash
advances to the contracted medical professional corporations and its other
customers, substantially all of whom are in the health care industry.
Principles of Consolidation - The accompanying financial statements include the
accounts of Health Professionals, Inc. and its wholly owned subsidiaries (the
"Company"). All operations are conducted by CSI and its subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Revenue Recognition - The Company recognizes revenues as services are provided.
Accounts Receivable - The Company records allowances related to the amounts due
from the professional corporations, with whom CSI has contracted, based upon the
excess of the amounts due from the professional corporations above the
collateral, primarily the receivables of the professional corporations, even
though such advances are expected to be collected from future operations. The
Company records patient accounts receivable for those medical professional
associations that it owns at net of allowances for those items that the company
will not collect on, such as certain contractual amounts and bad debts.
Depreciation and Amortization - Equipment, furniture and fixtures are recorded
at cost and are depreciated over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the life of the related lease
or the useful life of the asset, whichever is shorter. Depreciation and
amortization are computed principally by the straight-line method.
Inventory - Inventory is recorded at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Per Share Information - Per share information is computed based on the weighted
average number of common shares outstanding. Per share information excludes
common equivalent shares since their inclusion would be anti-dilutive. All share
and per share data in the accompanying financial statements reflect the effects
of the Company's 1996 one-for-ten reverse split for all periods presented.
F-7
<PAGE>
Costs in Excess of Net Assets of Businesses Acquired and Covenants Not to
Compete - The excess of costs over net assets of businesses acquired is being
amortized on a straight-line basis over 25 years. Covenants not to compete are
amortized over their 2 year economic life. The Company periodically reviews the
carrying value of these intangible assets and records adjustments when it is
determined that the assets are no longer considered fully recoverable from
future operating cash flows.
Asset Impairments - During fiscal 1997, the Company adopted Financial
Accounting Standard Statement No. 121 entitled "Accounting for the Impairment of
Long-Lived Assets to be Disposed" of which was not significantly different from
the Company's previous asset impairment accounting policy. The Company
periodically reviews the carrying value of certain assets in relation to
historical results, current business conditions and trends to identify potential
situations in which carrying value of assets may not be recoverable. If such
reviews indicate that the carrying value of such assets may not be recoverable,
the Company estimates the undiscounted sum of the expected cash flows of such
assets to determine if such sum is less than the carrying value of such assets
to ascertain if a permanent impairment exists. The Company determines the fair
value by using quoted market prices, if available for such assets, or if quoted
market prices are not available, the Company discounts the expected future cash
flows of such assets.
Income Taxes - The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, effective October 1, 1993 and elected
not to restate financial statements for prior periods. The statement requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and tax
basis of assets and liabilities. The adoption of Statement No. 109 did not have
a material effect on the accompanying consolidated financial statements.
Stock Based Compensation - On October 23, 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which is effective for financial statements for fiscal years beginning after
December 15, 1995. Statement No. 123 provides a fair value method of accounting
for stock-based compensation arrangements rather than the intrinsic value based
method contained in APB Opinion No. 25. The Statement does not require an entity
to adopt the new fair value based method of accounting as it relates to
employees for the purpose of preparing its basic financial statements. Entities
which retain the APB Opinion No. 25 method of accounting will be required to
display in the footnotes pro forma net income and earnings per share information
as if the fair value based method had been adopted. The Company currently does
not intend to adopt the Fair-Value Method provided in Statement No. 123.
Reclassifications - Certain reclassifications to the prior year consolidated
financial statements have been made to conform to the 1997 presentations.
Estimates- The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Future Accounting Pronouncements - Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share," issued in February 1997, replaces the
current methodology for calculating and presenting earnings per share. Under
SFAS No. 128, primary earnings per share will be replaced with a presentation of
basic earnings per share and fully diluted earnings per share will be replaced
with diluted earnings per share. Basic earnings per share excludes dilution and
is computed by dividing income available to common shares outstanding. Diluted
earnings per share is computed similarly to fully diluted earnings per share in
accordance with APB Opinion No. 15. The Statement will be effective for
financial statements issued by the company after December 15, 1997. The impact
of SFAS No. 128 is not expected to be material.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, Financial
F-8
<PAGE>
Reporting for Segments of a Business Enterprise, establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
3. ACQUISITION OF CSI AND MEDICAL PRACTICES
On December 23, 1991, the Company acquired 100% of the outstanding common stock
of the Center for Special Immunology, Inc. ("CSI"). The purchase price was
$400,000 in cash, and unregistered shares of Common Stock of $600,000, based
upon the quoted market price (valued at $330,000 since such shares are not
freely tradeable). In addition, the acquisition agreement provided for
contingent consideration based upon the earnings of CSI for each of the three
years in the period from April 1, 1992 through March 31, 1995. For the year
ended March 31, 1994, no additional consideration was required. The final year
was calculated at two and one half times the increase in after tax earnings, as
defined, for the year ended March 31, 1995 over the year ended March 31, 1993,
or two and one half times the base year earnings amount if funds were not made
available during the year ended March 31, 1994 to CSI to open three new
facilities. As funds were not made available during the year ended March 31,
1994 to open three new centers, the minimum additional consideration of
$1,616,000 was recorded at September 30, 1994 as additional consideration due
resulting in an increase in "Costs in excess of net assets of business
acquired." The amount of additional consideration in each year was to be payable
40% in cash and 60% in stock. The number of shares is based upon the market
value of the Company's stock. Any unregistered shares issued in connection with
the acquisition have a one year price guarantee (protection year) following the
date on which the shareholders may first sell any of the acquired shares. If any
such shares are sold at less than $5.12, or such lower amount, the Company is
obligated to pay the difference in cash, subject to certain adjustments, one
year after the expiration of the protection year.
The Company, may at its option make the cash portion of the contingent payments
in common stock of the Company based upon the then prevailing market value per
share. (See Note 9)
In fiscal 1992 to 1995, the Company recorded aggregate reserves of $925,000
related to estimated losses on cash advances and trade receivables from the
medical practices. In early fiscal 1996, the related party physicians
collateralized the cash advances with specific security and a $765,000 recovery
was recorded.
From 1991 to part of fiscal 1996, the Company's services to the above medical
practices were conducted under the terms of contractual agreements, whereby fees
were earned by the Company for specific services and the underlying medical
practices remained under the ownership of physicians. During fiscal 1996, the
Company's Board of Directors decided, as a result of the recent permissibility
of corporations to practice medicine in certain states, among other factors, to
purchase the underlying medical practices and to release the collateral
discussed above. On January 1, 1996, the Company purchased the medical practices
in Fort Lauderdale and Miami, Florida from the Chairman of the Company's Board
of Directors, on April 1, 1996, purchased the medical practice in Chicago,
Illinois from its physician owner, and on September 30, 1996, purchased the
Irvine, California medical practice from a stockholder and member of the Board
of Directors of the Company. The purchase price of each location approximated
one year's net revenues (based upon the prior one year's net revenues for the
California and Florida practices and upon the next years estimated net revenues
for Illinois). The Florida medical practices were acquired for $1,366,000, of
which $1,300,000 was comprised of amounts then due to the Company from the
medical practices with the balance paid in cash. The Chicago practice was
acquired for $1,873,000, which was comprised of $786,000 in shares (valued at
fair value) of the Company's common stock and a purchase money obligation
payable of $750,000 and cancellation of amounts owed the Company of $337,000. As
of September 30, 1996, the Company issued 246,000 shares of common stock and
during year ended September 30, 1997, based upon an amendment of the original
acquisition agreement, a further 1,131,000 shares were issued. The amended
agreement decreased the value of the shares to be issued from 80% of the
acquisition price to 60%. The Irvine, California medical practices were acquired
for $2,309,000, of which
F-9
<PAGE>
$2,303,000 was comprised of amounts then due to the Company from the
medical practice with the balance in cash. In connection with the transaction,
the selling stockholders, each of whom are physicians, entered into non-compete
agreements with the Company for two years for Florida, Illinois, and California
which are valued at $250,000, $150,000 and $150,000, respectively. Costs in
excess of net assets acquired in connection with the above fiscal 1996
transactions aggregated $992,000, $1,445,000, and $876,000, for Florida,
Illinois and California, respectively.
The following is a proforma summary of the consolidated results of
operations after giving effect to the proforma amortization of costs in excess
of net assets of businesses acquired and elimination of intercompany
transactions as if the Company had acquired all of the practices on October 1,
1995 and October 1, 1994.
Year Ended September 30,
1996 1995
---- ----
(unaudited) (unaudited)
Revenues $ 8,551,000 $ 11,170,000
Net Loss $ (2,527,000) $ (628,000)
Net Loss per common share $ (0.82) $ (0.30)
On October 28, 1996, the Company purchased a medical practice located in Los
Angeles, California for $382,000. The acquisition price for the practice was
paid with 168,000 shares of the Company's common stock (valued at estimated fair
value) and will be supplemented by an earn-out. The earn-out will also be paid
in Company shares and will be calculated at 75% of collected revenues derived
from specified services provided to new patients during the one year period
commencing after the effective date of the practice operations transfer. The
earn-out stock will be valued at 70% of the average market closing price
calculated during the 20 trading days preceding the close of the earn-out
period. Costs in excess of net assets acquired in connection with the above
fiscal 1997 transaction aggregated $337,000.
Based on current market conditions and an analysis of projected undiscounted
future cash flows calculated in accordance with the provisions of SFAS 121, the
Company has determined that the carrying amount of the excess cost over net
assets of businesses acquired for certain acquisitions may not be recoverable.
The resultant impairment has necessitated a write-down of $3,934,000.
4. EQUIPMENT, FURNITURE AND FIXTURES AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and fixtures and leasehold improvements consist of the
following:
<TABLE>
<CAPTION>
Useful September 30,
Lives (Years) 1997 1996
------------- ---- ----
<S> <C> <C> <C>
Equipment, furniture and fixtures 5 - 7 $2,083,000 $2,561,000
Assets under capital lease obligations 5 - 7 164,000 325,000
Leasehold improvements 1 - 12 625,000 176,000
---------- ----------
2,872,000 3,062,000
Less accumulated depreciation and amortization 2,027,000 1,724,000
---------- ----------
$ 845,000 $1,338,000
========== ==========
</TABLE>
5. INCOME TAXES
The Company has not recorded any expense for Federal or state income taxes for
the years September 30, 1995 through September 30, 1997, due to the existence of
tax losses for all applicable periods.
The Company has investment and other tax credit carryforwards, and net operating
loss carryforwards of approximately $600,000 and $32,000,000, respectively,
expiring through the year 2012. The net operating loss is subject to an annual
limitation of approximately $1,300,000 based upon certain ownership changes.
F-10
<PAGE>
Deferred income taxes are comprised of the following:
Year ended September 30,
1997 1996
------------ ---------
Loss carryforwards $ 11,800,000 $ 10,500,000
Tax credit carryforwards 600,000 600,000
------------ ------------
12,400,000 11,100,000
Deferred tax asset valuation allowance (12,400,000) (11,100,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
Realization of any portion of the net deferred tax asset is not considered
to be more likely than not and accordingly, a valuation allowance has been
provided for such amount.
6. LONG-TERM DEBT AND FACTORING LINES OF CREDIT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1997 1996
-------- --------
<S> <C> <C>
Due to Officer (a) $ 16,000 $ 125,000
Notes Payable, less unamortized
discount of $300,000 and $36,000 respectively(b) 1,322,000 664,000
Medical practice purchase obligation (c) 648,000 355,000
Lease obligation (d) 51,000 474,000
Capital leases 164,000 199,000
Other (e) 206,000 176,000
---------- ----------
2,407,000 1,993,000
Less current portion 749,000 474,000
---------- ----------
$1,658,000 $1,519,000
========== ==========
</TABLE>
(a) In September, of 1996, the Company's Chairman of the Board and Chief
Executive Officer loaned the Company $125,000, due upon demand and bearing
interest at 8.25% per annum in order for the Company to meet current
commitments. This loan was repaid during year ended September 30, 1997. In
August 1997, he again loaned the Company $20,000 of which $4,000 was repaid
by September 30,1997 and a further $10,000 was repaid by November 1997.
(b) On December 28, 1995 and February 13, 1996, the Company closed on two
loans and securities purchase agreements with SunDance Venture Partners,
Ltd. (SunDance), from which the Company received net proceeds of $700,000 in
loans. Both notes provide for payments of interest at 12% per annum for the
first twenty-four months and at 13% per annum for the next twelve months,
followed by quarterly payments of principal and interest at 15% through
December 2000. The funds were utilized for working capital. From October
1996 to August 1997, the Company received $1,171,000 in cash proceeds from
$1,351,000 in convertible loans less original issue discounts of $180,000.
Of these loans $925,000 bear interest at 5% and $426,000 at 7% interest.
Furthermore, $551,000 of the loans mature between April to August 1999 and
$800,000 mature between August to November 2001. The loans are convertible
at 70% of the fair value of the stock on the day preceding the conversion
(Note 9). During 1997, the Company accrued approximately $42,000 of interest
to the balance of these loans.
(c) In connection with the purchase of the Chicago, Illinois medical
practice, the Company issued a $750,000 note payable bearing interest at 5%
per annum, payable in 22 monthly installments of principal and interest
through April 1999.
(d) Lease obligations consist of accruals for office space leases with
reduced rents in early years to straight-line rent expense over the life of
the lease. At September 30, 1997 and 1996 the Company had obligations of
$52,000 and $474,000, respectively. During 1997 and 1995 the Company had
settlements with landlords in the amounts of $53,000 and $97,000,
respectively. In connection with the settlements with the landlords the
Company wrote off lease reserves of approximately $347,000.
(e) Included in the current portion of long term debt are proceeds from a
loan of $200,000, bearing interest at prime plus 4% which
F-11
<PAGE>
matured in September 1997, but remains unpaid as of January 10, 1998.
Negotiations are being made to extend the due date of this loan (Note 9).
Payments required on long-term debt and lease obligations during each of the
five years subsequent to September 30, 1997 are as follows:
Year Ending
September 30
1998 $ 749,000
1999 900,000
2000 255,000
2001 468,000
2002 35,000
-----------
Total $ 2,407,000
===========
Factoring Agreement - Certain subsidiaries of CSI together with the medical
professional corporations presently under contract with or owned by said
subsidiaries entered into factoring agreements providing for up to
$2,500,000 in lines of credit, based upon eligible accounts receivable. Fees
charged by the factor for factoring was amended in June 1996 from an
initial 1% of all eligible receivables to an initial 1% of eligible
receivables up to $5,000,000 a year. The fee then progressively decreases to
.75% for eligible receivables in excess of $10,000,000 a year. Funds are
then advanced by the factor at 2% over prime. The advances are
collateralized by the related receivables. The advances drawn by the medical
professional corporations are guaranteed by CSI.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable and accrued expenses are Therapeutics and Home
Health expenses of approximately $1,077,000 at September 30, 1997, and
$266,000 at September 30, 1996. No other items included therein exceed 5
percent of total current liabilities.
8. LITIGATION AND COMMITMENTS
(a) During 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 stock and
requested certain information from the Company and certain of its
officers in connection with that investigation. The Company, and the
officers have complied with these requests.
While management believes that it has been successful in the matter
mentioned above, there is no assurance that there will not be a
material adverse effect on the financial condition or results of
operations of the Company and the accompanying consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
(b) In November 1997, two of the Company's lenders filed suit against the
Company for failing to comply with the conversion features of the
convertible loans. Management believes that this matter will be
resolved and such result will not have a material adverse affect on
the consolidated financial statements of the Company.
(c) The Company is subject to various legal proceedings, claims and
liabilities which arise in the ordinary course of its business. In
the opinion of management, the amount of ultimate liability with
respect to these matters will not materially affect the consolidated
financial statements of the Company.
F-12
<PAGE>
(d) Employment Agreements - The Company has an employment agreement with
a key executive for an initial term ranging of 3 years and at annual
salary of $275,000, subject to annual increases and incentive
bonuses in some instances. Future minimum commitments under this
agreement are as follows:
Year Ending
September 30,
1998 276,000
1999 291,000
2000 278,000
--------
$845,000
========
(e) Operating Leases - The Company is obligated under operating leases
for the use of its office facilities. Office leases provide for rent
increases due to escalation of real estate taxes and cost of living.
Future minimum payments on operating leases with non cancelable terms
in excess of one year at September 30, 1997 are:
Year Ending
September 30,
1998 $ 540,000
1999 544,000
2000 551,000
2001 400,000
2002 294,000
-------
$2,329,000
==========
Aggregate rental expense under operating leases was approximately
$536,000, $812,000, and $810,000, for the years ended September 30,
1997, 1996, and 1995 respectively.
9. STOCKHOLDERS' EQUITY
Reverse Stock Split-On April 19, 1996, the stockholders approved a
one-for-ten reverse stock split. All share and per share data in the
accompanying financial statements reflect the effects of the reverse
stock split for all periods presented.
Stock Option Plan- At September 30, 1997, the Company has one
Employee Stock Option Plan which is described below. The Company
applies APB Opinion No. 25 and related Interpretations in accounting
for its plan. Compensation costs charged against income for its
employee stock option plans was $84,000, $0 and $0, for fiscal
years ended September 30, 1997, 1996 and 1995 respectively. Had
compensation costs for the Company's Stock Option Plan been
determined based on the Fair Value at the grant dates for awards
under those plans consistent with the method of FASB statement
123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net Loss As reported ($8,381,000) ($2,960,000) ($1,097,000)
Proforma ($8,827,000) ($2,983,000) ($2,107,000)
Loss Per Share As reported $(1.47) $(.96) $ (.52)
Proforma $(1.55) $(.97) $(1.00)
</TABLE>
The Company has a stock option plan which provides for the granting
of options to its employees for up to 600,000 shares of common stock.
The exercise price of the option equals the market price of the
Company's common stock on the date of the grant and an options
maximum term is 5 years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1995, 1996 and 1997, respectively: no dividend yield for all
years; expected volatility of 46.5 percent in all years, risk-free
interest rates of 6.2, 6.8 and 6.0 percent for the option plan; and
expected lives of 5 years for the option plan.
F-13
<PAGE>
A summary of the status of the Company's stock options and warrants
as of September 30, 1995, 1996 and 1997, and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------- -------------------------- --------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Options and Warrants Exercise Price Exercise Price Exercise Price
- --------------------
<S> <C> <C> <C> <C> <C> <C>
O/S @ beginning of year 99,625 $ 297 52,950 $ 66 62,950 $ 48
Granted 51,900 50 10,000 5 1 ,235,734 1
Exercised -- -- -- -- -- --
Forfeited (98,575) (291) -- -- (101,600) (40)
------- ---- -------- ---
O/S @ End of year 52,950 66 62,950 48 1,197,084 1
====== == ====== == ========= =
Options and Warrants
Exercisable
at year-end 52,950 62,950 833,331
====== ====== =======
Weighted-Average
fair value
Of Options and
Warrants Granted
during the Year $ 19.46 $ 2.28 $ 0.94
======== ========== ==========
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at September 30, 1997.
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$ .50 125,000 4.8 years $ .50 125,000 $ .50
$ .75 to $ 1.00 1,047,084 4.8 years $ .82 683,371 $ .86
$ 1.25 25,000 5.0 years $1 .25 25,000 $ 1.25
--------- -------
1,197,084 833,371
========= =======
</TABLE>
Warrants - As of September 30, 1997, warrants initially issued in the
Company's 1991 public offering remain outstanding to acquire 57,256 shares
of the Company's common stock, exercisable at $53.50 per share through
1998. In connection with the Company's 1996 loans from SunDance, the
Company issued SunDance warrants to acquire 280,000 shares of common stock
exercisable at $2.50 per share through January 2001, which were valued at
fair value of $42,000. In July 1997, warrants were issued in connection
with a loan to acquire 100,000 shares of common stock exercisable at $.50
per share through July 2000, which were valued at fair value of $24,000.
In August 1997, warrants were issued in connection with certain
convertible loans to acquire 133,334 shares of common stock exercisable
at $.50-$1.25 per share through August 2000 which were valued at fair
value of $98,000. These warrants were recorded as original issue
discounts.
Underwriter Units - An underwriter holds an option to purchase 21,000
units, which was issued in connection with the sale of the Company's stock
in 1990. Once the holder exercises the option, the aggregate exercise
price of which is $598,500, the holder will be issued 21,000 shares of the
Company's common stock and class A warrants. The class A warrants are
exercisable at an aggregate exercise price of $748,125 to purchase 21,000
shares of the Company's Common Stock and 5,200 Class B warrants until
December 9, 1997. Each Class B warrant entitles the holder to purchase two
shares of the Company's Common Stock for $106.875 ($53.4375 per share).
F-14
<PAGE>
In September through November 1991, 104,890 Class A Warrants to purchase
209,580 shares of common stock were exercised for net proceeds to the
Company of approximately $7,460,000. In conjunction with the exercise,
52,445 Class B Warrants to purchase 104,890 shares of common stock were
issued. During the fiscal year 1992, 4,355 Class B Warrants to purchase
8,710 shares of common stock were exercised for net proceeds to the
Company of approximately $465,000. During the fiscal year ended September
30, 1994, 19,462 Class B Warrants to purchase 38,924 shares of common
stock were exercised for net proceeds to the Company of approximately
$2,080,000. The Class B Warrants are callable by the Company if the
average closing price of the Company's common stock equals or exceeds
$75.00 for twenty consecutive days prior to the five days before calling.
In January 1992, the Company issued warrants to purchase 4,000 shares of
common stock, exercisable over a period of five years at $85.00 per share,
to a landlord in return for certain rent abatements. In connection with a
subsequent settlement with that landlord, the exercise price of the
warrants was decreased to $6.875 per share.
In June 1992, the Company issued warrants to purchase 2,000 shares of
common stock, exercisable over a period of five years at $75.00 per share,
to the former Chairman of the Board and Chief Executive Officer of the
Company.
On July 19, 1993, the Company issued warrants to two consultants to
purchase a total of 60,000 shares of common stock, exercisable over a
period of five years at $31.25 per share. In connection therewith $120,000
was charged to operations. The warrants were cancelled and 40,000 warrants
were issued at an exercise price of $8.00 per share with the other terms
unchanged.
In October 1993, the Company issued warrants to purchase 10,000 shares of
common stock exercisable over a period of five years at $13.75 per share.
These warrants were issued to the Company's internal general counsel
(5,000) and a litigation attorney (5,000). In February 1994, the 5,000
warrants issued to the litigation counsel were cancelled. In December
1995, the 5,000 warrants given to the Company's general counsel were
modified to change the exercise price to $5.00 per share.
At September 30, 1997, the Company has reserved 1,197,084 shares of common
stock for issuance upon exercise of outstanding options and warrants.
Conversion of Debt to Equity- In February 1996, the Company's Board of
Directors approved an agreement to immediately convert, $3,000,000 of the
$3,193,000 convertible debt owed to the former CSI shareholders into
1,200,000 (post-split) shares of the Company's common stock valued at
$2.50 a share (post-split). In April 1997, the Board of Directors agreed
to convert $470,000 worth of convertible loans into 630,000 shares of the
Company's common stock and recorded $318,000 as additional cost in
connection with this conversion.
Sale of Common Stock - On May 3, 1996, the Company completed a selling
agreement with Societe Financiere du Seujet, LTD., a foreign investment
banking concern, pursuant to Regulation S in which the Company sold
500,000 shares of common stock for $2,000,000.
During fiscal 1996, the Company issued 160,000 shares of common stock to a
consultant. The shares of common stock were valued at $470,000 and were
issued in exchange for consulting services relating to financial matters,
and evaluating and structuring business acquisitions to be performed
through 1999. Also during fiscal 1996, the Company issued 259,000 shares
of common stock, valued at an aggregate $642,000, to professional advisors
and consultants for services rendered during the year.
During fiscal 1997, the Company issued 168,000 shares of common stock
valued at $382,000 towards the purchase of a medical practice in Los
Angeles, 1,131,000 shares were issued for the purchase of the Chicago
medical practice, 200,000 shares valued at $94,000 were issued in exchange
for legal services rendered, 100,000 shares valued at $125,000 were issued
for consulting services rendered, and 463,000 shares were issued in
exchange for liabilities amounting to $250,000 owed to CSI shareholders.
10. SIGNIFICANT CUSTOMERS AND RELATED PARTIES
One of the medical professional corporations that was under contract prior
to the sale to the Company on January 1, 1996 with CSI was controlled by
the Chairman of the Board and one was controlled prior to its sale to the
Company on September 30, 1996 by another individual who was a founder of
CSI, both of whom are physicians. Revenues derived by CSI directly from
those professional corporations amounted to $0, $2,717,000, and
$4,379,000, or 0%, 37% and 47% of operating revenues from continuing
operations for the years ended September 30, 1997, 1996 and 1995
respectively.
F-15
<PAGE>
The CSI Foundation, Inc. is controlled by the Chairman of the Board and
two other stockholders and performs research and development activities
primarily in connection with its Immune Reconstitution Cell Transfer
Therapy for late stage AIDS patients. During fiscal years 1997, 1996, and
1995, the Company recorded expenses of $184,000, $192,000 and $59,000,
respectively to the Foundation and was reimbursed by the stockholders the
sums of $0, $124,000 and $136,000, respectively. All such contributions
to the Foundation were for ordinary charitable purposes.
11. CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest (no amounts were capitalized) $255,000 $ 249,000 $338,000
</TABLE>
Supplemental schedule of noncash investing and financing activities:
1996
During fiscal 1996, the Company issued 160,000 shares of common stock to a
consultant. The shares of common stock were valued at $470,000 and were
issued in exchange for consulting services relating to financial matters,
and evaluating and structuring business acquisitions to be performed
through 1999. Also during fiscal 1996, the Company issued 259,000 shares
of common stock, valued at an aggregate $642,000, to professional advisors
and consultants for services rendered during the year.
During 1996, the Company acquired three medical practices for which
$3,603,000 of the purchase price consisted of amounts previously advanced
to or otherwise due from the medical practices, $1,083,000 consisted of
equity securities and $355,000 consisted of a note payable. In connection
with the transactions, the Company recorded accounts receivable, covenants
not to compete and costs in excess of net assets acquired of $1,250,000,
$550,000 and $3,313,000, respectively.
In February 1996, the Company's Board of Directors approved an agreement
to immediately convert, $3,000,000 of the $3,193,000 convertible debt owed
to the former CSI shareholders into 1,200,000 shares of the Company's
common stock valued at $2.50 a share.
1997
During fiscal 1997, the company entered into an addendum to an agreement
to purchase the Chicago medical practice. The addendum among other things
changed the amount of consideration to be paid in shares of the company's
common stock From 80% to 60% of the total purchase price. This change
resulted in a reduction of additional paid-in-capital of $320,000. In
addition the Company issued 1,131,000 shares in connection with the
acquisition.
During fiscal 1997, $470,000 of convertible loans were converted into
630,000 shares of common stock. In connection with the conversion, the
Company recorded $318,000 of additional cost.
During the year the company issued 463,000 shares of common stock in
satisfaction of $250,000 of certain liabilities owed to three officers of
the company.
During fiscal 1997, the company issued 100,000 shares of common stock
valued at $125,000 as a prepayment of consulting fees. In addition, the
company issued 200,000 shares of common stock valued at $94,000 for legal
services rendered during the year
During the year the Company acquired a medical facility in Los Angeles for
which 168,000 shares of common stock were issued. The
F-16
<PAGE>
stock was valued at $2.275 per share, the guaranteed per share price
stipulated in the purchase agreement.
During fiscal 1997, the Company issued 233,334 warrants valued at $122,000
in connection with certain loans.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash, accounts
receivables, prepaid expenses, and current payables and long-term debt.
The carrying value of such financial instruments approximate fair value.
The estimated fair value is not necessarily indicative of the amounts the
Company could realize in a current market exchange or of future earnings
or cash flows.
13. SUBSEQUENT EVENTS
During October and November 1997, The Company received proceeds of
$300,000 in convertible loans in a Regulation S transaction. Of these
loans $250,000 bears interest at 5% and $50,000 was at 8% interest. The
loans will mature in October and November 1999. In connection with these
loans, the Company issued warrants to acquire 125,000 shares of common
stock exercisable at $.50 per share through October 2002 and 12,500 shares
of common stock exercisable at $1.00 per share through November 2002.
F-17
<PAGE>
HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- --------- -------- -------- --------
Additions
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deduction of period
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997:
Allowance for doubtful
accounts $1,981,000 $ 938,000 $ -- $(458,000)(A) $ 2,461,000
Accumulated amortization of costs
in excess of net assets of
businesses acquired $ 765,000 $ 347,000 -- $(976,000)(B) $ 136,000
Accumulated amortization of
covenants not to compete $ 131,000 $ 287,000 $ -- $ -- $ 418,000
Year ended September 30, 1996:
Allowance for doubtful
accounts $1,702,000 $ (765,000) $1,044,000(C) $ -- $1,981,000
Accumulated amortization of costs
in excess of net assets of
businesses acquired $ 587,000 $ 178,000 $ -- $ -- $ 765,000
Accumulated amortization of
Covenants not to compete $ -- $ 131,000 $ 131,000
Year ended September 30, 1995:
Allowance for doubtful
accounts $1,382,000 $ 320,000 $ -- $ -- $1,702,000
Accumulated amortization of costs
in excess of net assets of
businesses acquired $ 438,000 $ 149,000 $ -- $ -- $ 587,000
</TABLE>
(A) Write-off of uncollectible receivables, net of recoveries.
(B) Write-off of accumulated amortization relating to costs in excess of net
assets of businesses acquired included in provision for impairment.
(C) Allowances acquired upon purchases of medical practices.
S-1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 3 to Registration Statement No. 33-37204 on Form S-3, and Post-Effective
Amendment No.1 to Registration Statement 33-42675 on Form S-8 of our report
dated January 10, 1998, which report raises substantial doubt about the
Company's ability to continue as a going concern, relating to the consolidated
financial statements and schedule of Health Professionals, Inc. and
subsidiaries appearing in the Company's Annual Report on Form 10-K for the
year ended September 30, 1997.
/s/ BDO Seidman, LLP
-----------------------
BDO Seidman, LLP
Miami Florida
January 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule containes summary financial information extracted from the
financial statements of HP1 for the 12 months ended September 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,243
<ALLOWANCES> 2,461
<INVENTORY> 63
<CURRENT-ASSETS> 3,047
<PP&E> 2,872
<DEPRECIATION> 2,027
<TOTAL-ASSETS> 6,620
<CURRENT-LIABILITIES> 6,448
<BONDS> 0
0
0
<COMMON> 145
<OTHER-SE> (1,671)
<TOTAL-LIABILITY-AND-EQUITY> 6,620
<SALES> 7,493
<TOTAL-REVENUES> 7,502
<CGS> 0
<TOTAL-COSTS> 15,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 466
<INCOME-PRETAX> (8,381)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,381)
<EPS-PRIMARY> (1.47)
<EPS-DILUTED> (1.47)
</TABLE>
